oKtics  onb  Systems  of  'fife  Insurance. 


POLITICS  AND  HYSTEKIES 


LIFE    INSURANCE 


BY 

ELIZUE    WEIGHT. 


BOSTON: 
LEE   AND    SHEPARD,   PUBLISHERS. 

NttW    YORK: 

LEE,  SHEPARD   AND   DILLINGHAM. 

1873. 


Wi 


Entered  according  to  Act  of  Congress,  in  the  year  1873, 

By  ELIZUR  WRIGHT, 
In  the  office  of  the  Librarian  of  Congress,  in  "Washington,  D.  C. 


WRIGHT  &  POTTER,  Printers,  19  Province  St.,  Boston, 


CONTENTS. 


Chapter  I.  Page 

Magnitude  of  the  business.  Mutual  autocracy.  Terrific  de- 
cadence and  its  cause.  Insurance  and  accumulation. 
"  Cooperative "  pure  insurance  impracticable.  Natural 
Premium,  How  the  commuted  or  artificial  premium  in- 
volves a  combination  of  accumulation  with  insurance. 
Source  of  the  mystery.  Blunder  of  making  the  penalty 
for  the  non-payment  of  contracted  premiums  an  increasing 
one.  The  endowment  swindle.  Self-insurance  defined. 
"  Insurance  value."  Difference  of  American  and  British 
Life  Insurance,  .  .  .  ...  .  .  .  1-16 

Chapter  II. 

MASSACHUSETTS  NON-FORFEITURE  LAW.  How  it  grew  out  of 
the  want  of  equity  between  the  treatment  of  policy-holders 
paying  all  cash  and  those  paying  part  in  notes.  Incorrect- 
ness of  its  "  surrender  charge."  Reversionary  dividends,  or 
paid-up  additions  forfeited  by  non-payment  of  premium  on 
original  policy.  Attempt  to  amend  the  law,  how  defeated. 
Minority  Report  on  Cash  Surrender  Value  Bill.  Sale  of 
old  life  policies  in  London.  Swindle  on  an  actual  endow- 
ment policy.  Bill  as  it  passed  the  House  and  was  defeated 
in  the  Senate.  Discussion  of  "  msurablc  interest."  Rea- 
sons why  insurance  should  cease  at  75.  Relative  issue  of 
life,  term  and  endowment  insurance  policies  from  1858  to 
1864.  Protest  of  the  president  of  a  life-insurance  company 
against  illustrating  the  business  as  a  series  of  bets.  That 
'  president  taken  at  his  word, 17-67 

Chapter  III. 

SUB  RENDER  CHARGE.  George  W.  Miller's  Convention  of  state 
Superintendents.  Prof.  Bartlett's  paper  which  defeated  the 
Surrender  Value  Bill.  Comments  of  the  "  National  Insur- 
ance Convention  "  thereon.  Reply  by  the  writer.  A  co- 
nundrum on  Life  Insurance, .  ,  .  :  ;  ;  . 


M49129 


vi  Contents. 

Page 
Chapter  IV. 

SAVINGS-BANK  LIFE  INSURANCE.  What  is  implied  by  a  fixed 
rule  of  reserve.  Importance  of  the  distinction  between  in- 
surance and  self-insurance  being  known  to  the  policy- 
holder.  The  savings-bank  feature  of  life  insurance  recog- 
nized by  Judge  Phillips.  Can  a  minimum  surrender  value 
be  stipulated  ?  Rationale  of  maximum  surrender  charge. 
How  TO  ADJUST  THE  PREMIUMS.  Advantages  of  the  sav- 
ings-bank system.  Value  of  Life  Insurance.  Explanation 
of  the  pre-calculated  analytical  tables,  with  samples.  The 
problem  they  solve.  Its  importance  to  stock  as  well  as 
mutual  companies, . 93-140 

Chapter  V. 

REDUCTION  OF  RATES.  Reply  to  Mr.  White.  The  author's 
confessions.  The  atonement  he  offers.  Attempt  to  illus- 
trate the  subject  by  a  miniature  hypothetical  law  of  mor-  ' 
tality,  with  interest  at  zero.  The  equitable  thing  contrasted 
with  the  ancient  blunder.  The  equitable  reduction  of  rates 
in  the  savings-bank  system  contrasted  with  Mr.  Winston's 
proposed  reduction, 140-151 

Chapter  TI. 

BLACK  AND  WHITE  MAIL.  Power  of  advertising  over  the 
press.  White  mail  more  injurious  than  black.  The  press 
in  the  New  York  premium  war  of  December,  1872.  How 
both  sides  fought  shy  of  the  truth.  How  the  policy-hold- 
ers' money  went  for  an  innunicrable  multitude  of  useless 
lines  at  a  cent  a  line.  What  really  did  the  business.  The 
hydraulic  pressure  of  money.  A  PRIZE  OF  ONE  THOUSAND 
DOLLARS.  What  will  certainly  come  of  it  in  1874,  .  .  151-162 

Chapter  Til. 

A  WORD  TO  THE  INSURANCE  AGENTS  OF  THE  UNITED  STATES. 
From  which  the  public  also  can  see  how  they  are  paid  and 

how  th«y  ought  to  be, 162-169 

» 

Chapter  VIII. 

A  RECAPITULATION.  Insurable  Interest.  Natural  Premium. 
Artificial  or  level  Premium.  Self-insurance.  Insurance 


Contents.  vii 

Page 

Value.  Surrender  Charge.  Assessment  of  Expenses. 
Loading  of  Premiums.  True  method  of  keeping  the  books 
of  a  life-insurance  company.  Surrender  Value.  Dividends 
on  the  "  contribution  plan."  The  true  remedy  of  the  pres- 
ent errors, 169-185 

4@=-  The  reader  whose  arithmetic  is  a  little  rusty  had  perhaps  het- 
ter  read  this  eighth  chapter  first. 

Chapter  IX. 

PREMIUM  NOTES,  LIENS,  DIVIDENDS  AND  TONTINE  POLICIES. 
The  uses  and  abuses  of  notes  and  "  lien."  Excessive  pre- 
mium the  only  capital  of  a  mutual  company.  Hence 
when  expenses  are  moderate  surplus  is  inevitable  whenever 
the  death-claims  are  not  excessive.  Modes  of  dividing. 
Homans  and  Fackler  the  authors  of  the  contribution  plan. 
Approved  by  Professor  Bartlett  of  West  Point.  What 
happened  in  January,  1870,  in  distributing  the  surplus  of 
the  Mutual  Life  on  the  contribution  plan.  Great  blunder 
after  great  expense  for  science ;  and  who  made  it.  What 
was  the  cause  of  all  this.  Evasion  of  law  by  tontine  poli- 
cies. If  they  are  to  continue  all  laws  -against  gambling 
should  be  repealed, 185-201 

Chapter  X. 

THE  MONEY  QUESTION  IN  RELATION  TO  LIFE  INSURANCE,    .  201-216 


Appendix. 

ACTUARIES'  RATE  OF  MORTALITY.  The  author's  acknowledg- 
ments. Papers  by  Mr.  EMORY  MCCLINTOCK,  actuary  of 
the  North-western  Mutual  Life  Ins.  Co.  of  Milwaukee,  .  216-238 


THE  POLITICS  AND  MYSTERIES 

OF 

LIFE   INSURANCE, 


Chapter  I. 

In  the  United  States  more  than  half  a  million  of 
persons,  chiefly  men,  have  their  lives  insured  for 
the  benefit  of  those  who  will  survive  them,  or,  in 
many  cases,  for  their  own  benefit,  if  they  survive  a 
designated  age.  The  business  is  done  entirely  by 
corporations,  more  or  less  "mutual"  in  their  con- 
stitution or  charter,  more  or  less  regulated  in  their 
conduct  by  State  laws,  and  more  or  less  preyed 
upon  by  State  officials. 

These  corporations,  few  of  which  are  over  thirty 
years  old,  differ  exceedingly  as  to  the  extent  and 
amount  of  their  business,  and  the  magnitude  of  their 
resources  ;  their  number  of  policies  ranging  from  less 
than  one  thousand  to  more  than  seventy  thousand, 
and  their  assets,  exclusive  of  future  premiums,  from 
less  than  $100,000  to  more  than  $50,000,000.  We 
haye  in  fact  the  anomaly  of  a  company,  having  an  an- 


2  Politics  and  Mysteries  of 

nual  revenue  of  $15,000,000,  with  about  $60,000,000 
in  hand,  which  though  constitutionally  "mutual" 
and  theoretically  perfectly  democratic,  is,  de  facto, 
autocratic,  the  chief  officer  holding  proxies  enough 
to  secure  his  own  reelection,  in  spite  of  any  opposi- 
tion short  of  the  miraculous.  An  autocracy  may 
be  the  best  government  in  the  world  or  it  may  not 
be,  according  to  the  character  of  the  autocrat.  The 
prejudices  of  o,ur  country  are  certainly  not  in  its 
:  fayor.  .In' the  politics  of  life  insurance,  whenever 
takes. place,  the  individual  constitu- 
ember,''  finds  that  if  he  would 
retreat  from  a  position  where  he  is  a  political  ci- 
pher, he  must  make  a  sacrifice  of  money  in  some 
sort  of  proportion  to  the  time  he  has  occupied  it. 
He  perceives,  rather  to  his  dismay,  that  he  went  in 
without  stipulating  with  due  caution  the  terms  on 
which  he  could  get  out,  in  case  he  should  become 
dissatisfied.  If  he  had  exercised  that  prudence, 
the  autocracy  of  the  corporation  would  have  been 
under  heavy  bonds  for  its  good  behavior,  instead 
of  holding  the  members  under  heavier  and  heavier 
bonds,  to  acquiesce  in  whatever  it  should  please 
to  do. 

That  the  life-insurance  policy,  in  its  usual  form, 
is  not  a  bargain  which  both  parties  enter  into  with 
their  eyes  open  to  all  its  contingencies,  is  sufficiently 
obvious,  from  the  rapid  rate  at  which  policies  are  can- 
celled, with  more  or  less  loss  to  the  individual,  and 


Life  Insurance.  3 

sometimes  with  a  loss,  though  generally  with  a  gain, 
to  the  company.  The  rate  of  cancellation  has  so  much 
increased  of  late,  that  in  many  companies  hardly 
half  of  those  who  enter  having  bargained  to  pay 
from  ten  to  fifty  annual  premiums,  should  they 
live  long  enough,  ever  pay  the  second.  A  recent 
State  Eeport,  shows  150,000  policies  terminated  in 
a  single  year,  and  only  about  139,000  new  ones 
entered.  The  fact  that  under  the  ordinary  form  of 
policy,  the  longer  one  stays  in  the  company,  the 
more  it  costs  him  to  get  out,  must  have  something 
to  do  in  accounting  for  this  immense  outward  scram- 
ble. It  cannot  be  that  all  these  people  have  backed 
out  because  they  have  ceased  to  need  insurance,  or 
have  found  themselves  mistaken  in  supposing  that 
they  needed  it.  The  supposition  is  more  reason- 
able that  they  have  discovered  the  bargain  was  not 
quite  fit  to  be  made,  and  that  inasmuch  as  there 
is  a  .considerable  probability  that  the  necessity  for 
insurance  will  not  continue  through  the  term  of  the 
policy,  it  is  better  to  cancel  it  while  the  cost  is  at 
its  minimum.  They  may  also  have  discovered  that 
there  is  far  more  mystery  than  democracy  in  life 
insurance,  no  matter  how  purely  mutual  the  plan. 
They  may  have  discovered  that  a  life  policy  under 
certain  legal  provisions,  designed  to  protect  the  in- 
terest of  the  beneficiary,  is  equivalent  to  a  man's 
making  a  will  which  he  cannot  himself  annul.  Few 


4  Politics  and  Mysteries  of 

men  with  their  eyes  open,  would  do  this,  even  if 
the  law  allowed  it. 

The  object  of  this  volume  is  to  show  that  all  the 
real  benefits  of  life  insurance  can  be  obtained  under 
a  policy  which  can  be  perfectly  understood  by  both 
parties,  without  obliging  the  individual  to  submit 
to  any  wrong  at  the  hands  of  an  autocratic  or 
pseudo  corporation,  a  policy  which  provides  fairly 
and  equitably  for  the  contingencies  of  the  party's 
ceasing  to  need  insurance,  or  being  unable  to  pay 
for  it,  as  well  as  that  of  his  death. 

There  are  two  ways  of  providing  for  a  surviving 
family:  1.  Insurance,  pure  and  simple ;  2.  Accu- 
mulation. The  former  is  immediate.  It  creates  an 
estate  instantaneously — so  far  as  the  interest  therein 
of  heirs  is  concerned.  The  latter  is  slow,  entirely 
too  slow  for  the  particular  exigency,  though  it  has 
the  advantage  that  it  will  benefit  the  party  himself 
in  time.  Yet  it  is  what  every  man  attempts,  or 
ought  to,  whether  he  insures  or  not.  Of  insurance, 
pure  and  simple,  when  you  cease  to  pay  and  still 
live,  there  is  nothing  left.  It  would  be  a  some- 
what improvident  citizen  who  should  insure  his  life 
as  long  as  it  continued  to  be  productive,  and  sur- 
viving that  period,  should  have  to  resort  to  the 
poorhouse  for  his  own  support. 

For  the  purpose  of  insurance,  life  is  divided  into 
units  of  time,  each  measuring  a  year,  during  which 
the  risk  is  assumed  not  to  change,  but  from  any  one 


Life  Insurance.  5 

year  of  age  to  that  which  succeeds  it  the  risk  in 
creases  according  to  an  assumed  scale,  which  is 
founded  on  the  mortality  observed  of  a  large  num- 
ber of  lives  of  the  same  ages  under  similar  circum- 
stances. Insurance,  pure  and  simple,  is  when  the 
risk  of  each  year,  no  more  and  no  less,  is  paid  for 
at  the  beginning,  in  the  course  of,  or  at  the  end  of 
the  year.  The  perfection  of  it  in  theory  is  what  is 
called  "cooperative  insurance,"  where,  for  example, 
a  thousand  persons  agree  to  pay  $1  each  to  the  fam- 
ily of  each  deceased  member.  If  the  agreement  is 
carried  out,  the  first  that  dies,  in  consideration  of 
his  own  obligation  to  pay,  having  actually  paid 
nothing,  leaves  his  family  $999,  drawn  from  other 
members.  The  second  leaves  $998.  And  so  on. 
If  the  lives  were  all  of  the  same  age,  and  unexcep- 
tionable in  health,  an  equal  payment  would  be  fair, 
and  the  number  of  them  within  a  year  could  be  so 
nearly  predicted  as  to  make  it  practicable  to  pro- 
vide for  the  death-claims  by  paying  in  advance,  that 
is,  by  premiums  equivalent  to  the  risk  of  the  year. 
If  such  premiums  only  were  paid,  there  would,  if 
the  calculation  proved  correct,  be  nothing  left  at  the 
end  of  any  year ;  and  every  year,  as  the  vitality  of 
the  party  decreased,  the  premium  for  the  year 
would  increase.  This  premium  for  a  given  sum 
insured,  increasing  every  year  according  to  the 
increased  chance  of  the  party  dying  in  that  year,  it 
is  convenient  to  call  the  natural  premium.  Insur- 


6  Politics  and  Mysteries  of 

ance,  pure  and  simple,  would  be  by  the  payment, 
annually,  of  these  natural  premiums.  But  in 
reality  it  does  not  exist,  for  reasons  that  are  too 
obvious  to  need  statement.  The  "  cooperative 
plan,"  so  far  as  it  illustrates  pure  insurance,  may  be 
set  down  as  impracticable. 

What  does  exist,  is  a  plan  which  combines  in  the 
same  policy  a  series  of  pure  and  simple  yearly  in- 
surances,  with  a  plan  of  accumulation  by  annual 
deposits.  And  these  two  processes  are  so  undis- 
tinguishably  blended  in  the  policy,  as  to  be  a  per- 
fect mystery  to  the  insured,  if  not  to  the  officers  of 
the  company  itself.  The  insured  generally  agrees 
to  pay  an  equal  annual  premium,  either  during  the 
whole  term  of  the  policy,  or  a  considerable  part  of 
it.  He  knows  pretty  well  that  this  is  larger  than 
the  "natural  premium,"  or  what  it  will  cost  to  in- 
sure the  amount  of  his  policy  the  first  year.  But 
he  is  not  told  in  the  policy  how  much  of  it  is  for 
the  first  year's  risk,  and  how  much  for  accumula- 
tion. All  the  information  he  can  get  is,  that  inas- 
much as  his  policy  covers  many  years,  including 
those  future  ones  in  which  it  will  cost  more  than 
the  whole  of  his  premium  to  insure  the  amount  of 
his  policy  for  one  year,  the  company  must  have 
something  to  accumulate  to  supply  the  deficiency. 
He  is  thus  persuaded  to  leave  this  matter  of  the 
accumulation  entirely  to  the  company,  and  is  proba- 
bly enticed  into  an  agreement  that  in  case  he  fails 


Life  Insurance.  7 

to  pay  any  premium  when  due,  he  shall  forfeit  the 
entire  accumulation  in  the  company's  hands,  or 
when  he  wishes  to  surrender,  shall  have  only  what 
he  does  not  value,  a  small  "  paid-up  "  policy. 

Now  what  is  quite  plain  is,  that  the  policy  which 
combines  insurance  with  accumulation  is  the  right 
practical  thing,  if  under  the  right  conditions,  inas- 
much as  every  person  who  needs  insurance,  also 
needs  to  accumulate,  so  that  if  he  survives  the 
proper  period  of  insurance,  he  shall  have  the  enjoy- 
ment of  a  more  or  less  considerable  accumulation, 
and  because  insurance  pure  and  simple  is  really 
impracticable,  for  the  want  of  a  sufficient  security 
for  the  persistence  of  the  natural  premiums. 

The  permanence  of  the  company  depends  not 
only  upon  the  premiums  being  adequate  to  the  risks 
assumed,  but  upon  the  policy-holder's  being  suffi- 
ciently bound  to  continue,  so  that  the  company  may 
have  a  broad  enough  basis  to  realize  death-claims 
nearly  according  to  the  assumed  law  of  mortality. 
Precisely  what  the  penalty  of  a  non-performance  of 
the  contract  on  the  part  of  the  policy-holder  should 
be,  may  be  a  matter  of  some  doubt  or  difference  of 
opinion.  But  that,  if  possible,  it  should  be  greater 
at  the  end  of  the  first  year  than  ever  after,  is  simply 
a  matter  of  demonstration. 

Here  is  a  blunder  more  than  a  hundred  years  old. 
The  penalty  has  been  a  constantly  increasing  one  ! 
It  makes  a  perfect  farce  of  the  accumulative  feature 


8  Politics  and  Mysteries  of 

of  the  policy.  It,  in  fact,  enlarges  a  salutary  pen- 
alty into  a  system  of  betting  or  gambling  on  per- 
sistence, totally  unnecessary  and  foreign  to  the  aim 
of  the  business. 

It  has  been  the  lot  of  the  writer  to  be  connected 
practically  with  life  insurance  for  many  years,  either 
as  an  agent,  a  state  commissioner  of  insurance,  or 
an  actuary.  In  the  latter  capacity  he  has  had  fre- 
quent occasion  to  ascertain,  by  various  standards, 
the  proper  reserve  which  a  company  should  have, 
to  make  distribution  of  surplus,  and  to  give  an 
opinion  on  the  value  of  one  company's  business  to 
be  transferred  to  another.  Commencing  with  a 
profound  conviction  of  the  usefulness  of  a  policy  to 
himself,  and  no  knowledge  of  the  principles  of  the 
business  whatever,  he  assumed  that  science  had 
done  for  it  about  all  that  it  could,  and  for  a  long 
time  took  it  for  granted  that  what  it  had  not  done 
could  not  be  worth  doing.  But  old  blunders  will 
always  show  themselves  when  run  into  new  fields. 
One,  which,  though  very  mischievous  when  con- 
fined to  the  ordinary  whole-life  policy — a  policy 
which  itself  commits  another  blunder  of  covering 
years  of  life  that  are  really  uninsurable — ,  might 
have  been  tolerated  or  escaped  observation  a  century 
longer,  forced  itself  upon  his  attention  when  the 
American  appetite  for  independence  and  self-insur- 
ance had  multiplied  endowment  policies,  of  not  very 
long  terms.  This  sort  of  policy,  which  is  the  very 


Life' Insurance.  9 

perfection  of  life  insurance,  the  very  thing  for  a 
high-spirited  yonng  man  to  take,  by  applying  to  it 
the  old  blunder  that  always  adhered  to  the  life  pol- 
icy of  putting  expenses  and  commissions  as  a  per- 
centage on  the  premium,  was  converted  into  a  swin- 
dle. It  was  a  swindle  not  easily  detected,  im- 
mensely profitable  to  the  agent,  but  intensely  unsat- 
isfactory to  the  policy-holder  after  being  found  out. 

The  headlong  rush  into  endowment  policies, 
which  began  about  fifteen  years  ago,  without  correct- 
ing the  British  error  in  loading  the  premiums  and 
assessing  expenses,  and  without  distinguishing  be- 
tween the  insurance  and  self-insurance  of  a  policy, 
is  what  has  brought  life  insurance  in  this  country  to 
its  present  grief.  This  volume  is  designed  to  call 
public  attention  to  the  subject  in  such  a  way  that 
our  companies,  which,  in  spite  of  all  their  errors, 
are  generally  in  a  sound  condition,  shall  be  obliged 
in  their  future  business  to  give  endowment  policies 
that  are  fit  to  be  made.  When  this  is  done,  there 
will  be  small  demand  for  any  other  kind. 

The  first  thing  to  be  done  is  to  achieve  a  distinct 
definition  of  the  terms  we  shall  have  occasion  to  use. 

SELF-INSURANCE  . 

This  element  of  a  life-insurance  policy  always 
exists  whenever  more  than  the  natural  premium  for 
a  single  year,  with  the  working  expenses  thereof, 

is  paid.     It  is  the  same  as  the  reserve  on  the  policy, 
i* 


io  Politics  and  Mysteries  of 

at  the  end  of  the  year,  and  is  commonly  called  the 
value  of  the  policy.  The  propriety  and  significance 
of  the  term  "  self-insurance "  will  be  best  under- 
stood by  an  example. 

Assuming  interest  at  4  per  cent.,  and  the  Amer- 
ican Table  of  Mortality  (that  prepared  by  Mr. 
Sheppard  Homans,  on  the  experience  of  the  Mutual 
Life  Ins.  Co.  of  New  York),  the  annual  premium 
for  a  whole-life  policy  of  $1,000,  at  the  age  40, 
apart  from  the  addition  or  "loading"  for  expenses, 
is  $22.36.  This  is  the  mathematical  equivalent, 
under  the  assumptions,  to  the  series  of  net  natural 
increasing  premiums,  beginning  with  $9.42.  But 
if  $22.36  is  paid  instead  of  the  $9.42,  it  is  impor- 
tant to  remark  that  the  risk  to  be  borne  by  the  com- 
pany on  the  policy  is  diminished.  It  is  supposed, 
for  the  sake  of  simplicity,  that  the  death-claim,  if 
it  occurs,  is  settled  at  the  end  of  the  year,  till  which 
time  the  provision  for  it  paid  or  in  hand,  at  the 
beginning  of  the  year,  is  on  interest  at  4  per  cent. 
If  only  the  natural  premium  of  $9.42  has  been  paid, 
amounting  to  $9.79,  at  the  end  of  the  year,  and  the 
party  dies,  the  other  members,  that  is,  the  company, 
has  to  pay  $1,000  —  $9.79=$990.21.  If  $22.36  has 
been  paid,  amounting  to  $23.25  at  the  end  of  the 
year,  then  the  company  has  to  pay  but  $1,000  — 
$23.25=n$976.75.  Hence  the  risks  in  the  two  cases 
are  in  the  ratio  of  990.21  to  976.25,  and  if  the  former 
is  called  an  insurance  of  $1,000,  then  the  latter  is 


Life  Insurance.  n 

Q  7  fc.   7  f\ 

an  insurance  of  only  qnTrrX  1000=986.41.    And 


the  difference,  1000  —  986.41  =  13.59,  is  not  in- 
sured by  the  company.  But  since  the  heir  receives 
it  as  part  of  the  death-claim,  it  is  reasonable  to  say 
that  the  party  insured  himself  to  that  extent. 
Thus,  on  account  of  the  increase  of  the  artificial 
net  premium  over  the  natural  one  of  the  year, 
for  the  amount  insured,  the  business  of  the  year 
necessarily  resolves  itself  into  two  generically  dis- 
tinct transactions.  First,  the  party  buys  of  the 
company  an  insurance  of  $986.41,  for  which  he 

pays  the  natural  net  premium  of         *n  x9.42= 

9.29.  Consequently  the  balance  of  his  premium, 
22.36  —  9.29=13.07,  is  a  mere  savings  bank  de- 
posit, which,  increased  at  4  per  cent.,  makes  up 
$1,000,  by  self-insurance  or  accumulation. 

If  the  death  does  not  occur,  then  the  $13.59  must 
remain  in  the  company's  hands,  by  mathematical 
necessity,  as  well  as  legislative  enactment,  to  dimin- 
ish future  risks,  which  is  the  same  thing  as  to  pro- 
vide against  future  deficiencies  of  the  level  premium. 
It  is,  in  fact,  a  trust  fund,  accepted  on  the  condition 
that  it  shall  count  on  the  death  claim,  if  it  occurs, 
and  remain  on  hand  to  diminish  the  future  risks,  if 
it  does  not.  It  is  not  available  for  a  claim  on  any 
other  policy. 

The  effect  of  paying  the  $22.36  the  second  y^ar, 


12  Politics  and  Mysteries  of 

is,  that  the  company  will  have  $35.95,  which,  at 
the  end  of  the  year  will  amount  to  $37.39,  instead 
of  the  $10.01  which  it  would  have  had  if  only  the 
natural  premium  for  $1,000  had  been  paid.  Hence 
the  risks  this  second  year  are  in  the  ratio  of  989.99 
to  962.61.  Consequently,  the  insurance  done  by 

962  61 

the  company  is  Qo7'QQ  X  1000—972.34,  andthebal- 
«/o  i  *y  y 

ance,  $27.66,  is  the  'self-insurance,  reserve,  or 
"value  of  the  policy,"  at  the  end  of  the  second 
year.* 

It  would  be  better,  always,  to  call  this  the  self- 
insurancQ  value  of  the  policy,  to  distinguish  it  from 
another  very  important  and  different  thing,  which 
is  properly  the  insurance  value  of  the  policy,  that 
is,  the  sum  which,  paid  in  advance,  under  the 
assumptions,  would  exactly  pay  for  all  the  insur- 
ance which  the  company  is  to  do  under  the  policy, 
as  distinguished  from  that  which  the  party  is  to  do 
himself. 

It  will  readily  be  perceived  that  the  ratio  in  which 
the  two  processes  of  insurance  and  self-insurance 
or  accumulation,  enter  into  the  business  of  each 
year  can  be  as  easily  and  accurately  precalculated 
as  anything  else  relating  to  the  business,  so  that 
there  is  no  excuse  for  keeping  mixed  up  in  mys- 
tery two  things  that  are  essentially  different,  and 

*  The  results  would  be  slightly  different  by  the  Actuaries'  Mortality, 
for  which  see  Appendix. 


Life  Insurance.  13 

both  perfectly  simple  and  intelligible  by  themselves. 
And  since  the  working  expenses  of  a  life-insurance 
company  are  much  larger  than  those  of  a  savings 
bank  having  the  same  amount  of  funds  on  hand,  it 
is  quite  obvious  that  while  the  various  premiums 
paid  are  divided  between  insurance  and  self-in- 
surance in  exceedingly  different  ratios,  only  the 
wildest  wreck  of  equity  can  result  from  assessing 
the  expenses  upon  the  premiums  paid.  Much  less 
would  come  from  assessing  them  on  the  amount  of 
the  policy,  but  that  would  only  about  half  correct 
the  blunder  in  the  average  case.  There  can  be  no 
reasonable  correction  till  the  insurance  is  carefully 
distinguished  from  the  self-insurance  on  every  pol- 
icy, and  the  significance  of  the  "  insurance  value " 
of  every  policy  is  recognized, — in  short,  till  the 
insurance  is  treated  on  insurance  principles,  and 
the  accumulation  on  savings  bank  principles. 

The  peculiarity  by  which  American  is  distin- 
guished from  British  life  insurance,  is  the  more 
distinct  and  pronounced  recognition  on  this  side  of 
the  water  of  the  reserve  on  each  and  every  policy 
as  a  trust  fund,  applicable  only  to  the  claim  on  that 
particular  policy.  Or  what  is  the  same  thing,  the 
recognition  of  the  aggregate  net  value  of  all  the  out- 
standing policies  as  a  matured  liability  to  the  living 
policy-holders.  To  this  the  American  companies 
are  more  or  less  bound  by  State  law,  while  the 
British  are  left  entirely  to  be  a  law  to  themselves. 


14  Politics  and  Mysteries  of 

The  practical  difference  is  one  of  life  and  death,  as 
a  general  fact.  An  American  company  may  die, 
but  unless  it  criminally  evades  the  law,  it  will  die 
solvent, — a  much  milder  calamity  than  that  which 
overtakes  about  nine-tenths  of  the  British  offices. 
This  means  that  it  will  be  able  to  return  to  the 
policy-holders  the  trust  fund,  or  accumulation.  It 
will  only  be  unable  to  continue  its  insurances. 
Even  this  mild  calamity  which  is  now  impending, 
more  or  less,  over  all  our  offices,  might  be  averted 
by  heroically  correcting  the  blunder  of  mixing 
things  which  are  not  homogeneous. 

Were  the  business  of  life  insurance  in  this  coun- 
try practically  in  the  hands  of  scientific  men,  the 
practical  errors  would  soon  be  corrected.  What 
little  science  has  been  turned  in  this  direction  is  all 
right,  but  it  is  very  little  regarded.  The  man  who 
controls  the  biggest  pile  of  policy-holders'  money, 
regards  scientific  men  not  as  guides  but  tools.  If 
one  does  not  suit  him,  he  tries  another.  A$  to  the 
men  who  control  the  smaller  piles,  they  look  to  the 
bell-wether,  and  not  to  the  stars,  for  their  courses. 
The  only  hope  of  improvement  is  in  the  growing 
intelligence  of  the  people  themselves. 

It  is  only  by  the  cultivation  of  thought,  truth, 
and  justice  among  mankind,  that  useful  institutions 
can  be  kept  from  decay.  There  was  included  in 
life  insurance  at  the  start,  too  much  falsehood,  not 
by  evil  intention,  but  want  of  thought.  It  was  im- 


Life  Insurance.  15 

mensely  increased  on  this  side  of  the  water,  when 
we  made  our  policies,  as  we  had  good  reason  to  do, 
more  accumulative,  and  this  was  for  want  of 
thought.  But  a  falsehood  which  creeps  in  unwit- 
tingly may  be  adopted  by  men  of  mercenary  mo- 
tives, and  used  wittingly,  with  high  pretensions,  for  a 
mean  purpose.  This  has  been  done.  Its  tendency 
is  but  too  plain.  Let  us  suppose  an  institution,  in- 
tended to  promote  a  universal  regard  for  truth, 
should  use  a  lie  to  frighten  people  from  lying; 
plainly,  whatever  might  be  its  temporary  success, 
it  could  not  be  permanent.  Organized  falsehood, 
no  matter  how  good  its  motive,  grows  into  certain 
failure.  Power  without  justice,  proves  its  own 
executioner.  Truth  is,  after  all,  the  vital  force  of 
society,  transmuting  itself  into  the  forms  of  jus- 
tice, order  and  happiness.  Falsehood,  father  and 
mother  of  ignorance,  is  the  principle  of  social  dis- 
ease and  death.  Nothing  which  is  good  for  society 
courts  concealment.  Life  insurance  will  be  good 
for  society,  when  the  policy  conceals  nothing,  but 
speaks  so  plainly  on  every  point,  as  to  leave  the 
agent  no  opportunity  to  lie,  if  so  disposed,  nor  the 
policy-holder  any  claim  to  be  dissatisfied,  unless  it 
is  with  himself. 

The  writer  has  discussed  this  subject  in  vari- 
ous journals,  as  different  points  and  aspects  of 
it  have  arisen  during  the  last  three  years,  and 
published  a  set  of  precalculated  working  tables, 


1 6  Politics  and  Mysteries  of 

with  an  introductory  explanation,  designed  to  give 
information  to  the  ordinary,  as  well  as  the  scientific 
reader.  It  appears  to  him  that  the  happiest  of 
these  attempts  to  popularize  a  very  dry  though  im- 
portant subject,  will  be  more  useful  to  the  reader 
who  wishes  to  get  at  the  marrow  and  merits  of  it, 
than  any  set  treatise.  He  has,  therefore,  arranged 
in  the  following  pages,  a  selection  from  them.  The 
algebra,  which  is  more  or  less  sparsely  scattered 
through  them,  may  be  skipped  without  losing  the 
pith  of  the  matter.  It  is  not  to  be  supposed  that 
the  ordinary  reader  will  in  all  cases  become  con- 
vinced that  the  solution  of  the  difficulty  here  pro- 
posed, is  the  correct  one,  or  the  best  that  can  be. 
He  will  wish  to  hear  the  other  side,  but  he  will 
not  fail  to  notice  this,  that  a  liberal  prize  is  of- 
fered to  any  one,  who  within  a  year  will  produce  a 
justification  of  the  practices  of  the  life  insurance 
companies,  by  me  stigmatized  as  errors  and  blun- 
ders. The  companies  that  persist  in  these  errors 
and  blunders,  have  a  pretty  strong  inducement  to 
add  to  this  prize,  should  there  be  need  of  it. 
Therefore,  if  the  attacks  I  have  herein  made  on  the 
received  and  long  practised  mode  of  doing  the  busi- 
ness, are  not  fully  answered  and  repelled  before  a 
year  comes  round,  from  the  date  of  that  offer,  the 
public  will  certainly  know  that  it  is  because  science 
and  money  can't  do  it. 


Life  Insurance.  17 

Chapter  II. 

MASSACHUSETTS  NON-FORFEITURE  LAW. 
The  writer  had  not  been  long  in  the  office  of  In- 
surance Commissioner  in  Massachusetts,  before  he 
was  struck  with  the  fact  that  the  penalty  of  forfeit- 
ure in  different  companies,  and  often  for  different 
members  of  the  same,  was  very  different.  Many 
companies  took  half  the  premium  in  the  note  of  the 
party  insured.  In  case  of  forfeiture  this  note  was 
never  collected,  so  that  the  company,  to  which  the 
note  was  precisely  the  same  as  cash,  in  fact  paid  a 
cash  surrender  value,  equal  to  the  amount  of  out- 
standing premium  notes,  while  to  the  party  who  had 
paid  the  whole  premium  in  cash,  it  would  pay  no 
surrender  value  at  all,  either  in  cash  or  further  in- 
surance, in  case  of  non-payment  of  premium  when 
due  !  This  glaring  violation  of  equity  was  urged 
upon  the  attention  of  the  legislature,  till  the  result 
was  the  Act  of  1861,  regulating  the  forfeiture  of 
policies.  For  the  want  of  any  knowledge  or  recog- 
nition at  that  period,  of  "insurance  value,"  as  the 
proper  basis  of  "  surrender  charge,"  the  Act  adopted 
the  received  absurd  rule  of  making  it  a  percentage 
of  the  reserve,  limiting  it  to  one-fifth, — except  so 
far  as  the  reserve  consisted  in  notes,  which  were  left 
as  cash  surrender  value,  without  charge.  For  this, 
and  other  reasons,  that  Act  is  very  crude,  and  in- 
adequate to  its  purpose.  It  fails  sufficiently  to  pro- 


i8  Politics  and  Mysteries  of 

tect  policies  of  large  cash  accumulation,  and  equally 
fails  to  interpose  a  reasonable  or  sufficient  barrier 
against  early  lapse.  In  this  respect  it  has  the  very 
fault  of  the  premium-note  system.  It  exacts  too 
much  of  the  company  in  the  early  stage  of  a  long 
policy,  and  too  little  in  all  other  cases.  All  that 
can  be  said  for  it  is,  that  the  Commissioner  and  the 
legislature  met  a  strong  demand  for  regulation  in 
the  best  way  they  then  knew  how.  The  strength 
of  the  case  will  appear  from  the  following  extract 
from  the  Fourth  Annual  Eeport  of  the  Massachu- 
setts Insurance  Commission,  1859  : — 

Public  opinion  has  been  too  unenlightened  to  oblige  the 
directors  of  these  institutions  to  follow  any  particular  rule  for 
avoiding  over-accumulation,  and,  left  to  themselves  entirely, 
they  seem  in  numerous  cases  to  have  attempted  to  take  two 
courses  at  once — on  the  one  hand  endeavoring  to  attract 
business  by  declaring  large  dividends,  and  on  the  other  to 
provide  for  safety  by  not  paying  them  for  a  long  time  if  at 
all.  Not  to  speak  of  other  faults,  this  plan  has  the  double 
disadvantage  of  not  being  either  decided  in  its  tendency  or 
intelligible  to  the  public. 

There  are  two  general  plans  adopted  for  avoiding  over- 
accumulation.  One  is  to  diminish  the  assets,  and  the  other  to 
increase  the  liabilities.  The  former,  when  the  surplus  is 
fairly  divided  among  those  who  have  contributed  to  produce 
it,  is  a  very  plain  and  satisfactory  process,  as  well  as  perfectly 
safe,  if  not  carried  beyond  the  right  mark.  The  latter,  which 
seems  to  have  grown  out  of  the  desire  to  divide  and  hold  on 
at  the  same  time,  a  feeling  nearly  as  old  as  life  insurance 
itself,  is  not  so  plain  and  is  attended  with  some  difficulties. 


Life  Insurance.  19 

According  to  this  plan,  when  a  mutual  company  finds  itself  in 
possession  of  much  more  than  enough  to  reinsure  its  risks,  or 
in  other  words,  to  meet  its  matured  liability  on  them,  it  in- 
creases that  liability  at  once  by  persuading  or  compelling  its 
members  to  insure  more,  the  additional  sum  insured  being 
that  of  which  each  member's  share  in  the  dividend  is  the 
single  premium,  at  his  present  age.  So  far  as  the  members 
are  concerned,  if  they  do  not  want  the  ready  money  and  do 
want  the  additional  insurance,  this  would  be  all  very  well, 
provided  the  company  gave  an  independent  policy,  but  it 
attaches  the  addition  to  the  policy  already  in  force  which  is 
conditioned  on  the  punctual  payment  of  its  annual  premium. 
If  that  premium  should  be  paid  punctually  for  twenty  years, 
and  one  payment  be  then  omitted,  not  only  the  policy  would 
be  forfeited,  but  the  additional  insurance,  though  fully  paid 
for  by  what  was  the  same  as  cash,  and  now  increased  in 
value,  would  go  to  nothingness  with  it.  The  absurdity  of 
having  the  forfeiture  of  an  annual-premium  insurance  work 
the  forfeiture  of  one  on  which  the  premium  has  all  been  paid 
down,  is  too  flagrant  to  need  dwelling  on,  yet  it  is  the  practice 
in  several  of  the  companies  doing  business  in  this  State. 
The  excuse  offered  for  this  palpable  injustice  is,  that  every 
insuree  is  made  aware,  before  taking  his  policy,  that  such  is 
the  condition  of  forfeiture,  both  of  it  and  all  the  additions 
that  may  be  made  to  it.  If  a  person  in  such  circumstances, 
commencing  a  life-long  experiment,  does  not  misunderstand 
the  conditions  of  the  policy,  he  may  misunderstand  his  own 
strength,  and  may  be  very  unwise  in  piling  up  penalties  to  be 
visited  years  hence  on  his  want  of  punctuality.  Why  should 
the  company  invite  him  to  do  it  ?  In  regard  to  the  forfeiture 
of  the  original  policy  itself  by  non-payment  of  premium,  we 
shall  have  more  to  say  by  and  by,  but  in  regard  to  new  single 
premium  insurance,  or  reversionary  dividend,  whether  liable 
to  forfeiture  or  not,  if  imperative  upon  the  company,  at  the 
option  of  the  insured,  it  involves  the  absurdity  of  insuring 


2o  Politics  and  Mysteries  of 

without  selection.  The  worst  lives  only  will  choose  rever- 
sions, and  this  must  tend  to  injure  the  company.  Only  where 
it  is  compulsory  on  all  the  members  to  accept  reversionary 
dividends,  will  the  average  vitality  of  the  members  be 
secured  for  this  class  of  insurance,  and  even  in  that  case,  if, 
as  is  sometimes  supposed,  the  beneficial  effect  of  selection 
wears  out,  it  must  be  worse  for  the  company  than  to  return 
the  surplus.  It  is  true  that  by  this  sort  of  addition  to  the 
policy,  while  the  liability  to  forfeiture  is  not  much  diminished, 
the  company  will  gain  much  more  if  it  takes  place.  Ought 
that  to  be  a  motive  with  an  institution  which  claims  to  be 
rather  philanthropic  than  mercenary  ? 

The  companies  that  have  resorted  to  this  plan  of  avoiding 
surplus  or  preserving  the  proper  relation  of  assets  to  liabili- 
ties, and  the  sums  they  have  added  to  the  amount  insured  by 
annual  premium,  are  as  follows : — 

State  Mutual,  Worcester,  .....  $84,180  86 

National,  Vermont, 16,144  24 

Manhattan,  New  York, 137,515  00 

Mutual  Life,  New  York, 3,111,354  69 


Total, $3,349,194  79 

Here  is  an  aggregate  of  more  than  three  millions  of  dol- 
lars of  insurance  for  which  the  companies  have  been  paid  in 
full,  every  dollar  of  which  is  liable  to  be  forfeited  by  the  non- 
payment of  premium  on  other  insurance !  The  present  value 
of  this  insurance  has  been  carefully  calculated  by  us,  but  has 
not  been  kept  distinct  from  that  of  the  policies  to  which  it  is 
attached.  It  probably  exceeds  one  million  of  dollars.  Ex- 
cept in  the  case  of  the  Mutual  Life  Insurance  Company  of 
New  York,  it  is  all  attached  to  whole-life  policies.  The  re- 
versionary dividends  of  the  Mutual  Life,  to  the  sum  of  f  13,- 
853.67,  are  attached  to  endowment  policies,  and  are  payable 


Life  Insurance.  21 

with  the  policy.  To  the  sum  of  f  41,657 .07,  they  are  attached 
to  term  policies,  and  though  cast  as  reversionary,  or  at  single 
premium  for  the  whole  life,  are  payable  at  death  only  in  case 
the  death  takes  place  within  the  term  for  which  the  life  is 
insured  in  the  policy.  To  illustrate :  suppose  the  holder  of  a 
seven-year  policy,  which  has  two  years  yet  to  run,  is  entitled 
to  $84.85,  as  his  share  of  cash  surplus.  The  company,  in- 
stead of  paying  it  to  him  in  cash,  adds  f  200  to  his  policy,  his 
age  now  being  40,  and  $200  being  the  amount  which  a  single 
premium  of  $84.85  will  insure,  payable  whenever  death 
occurs.  But  he  must  forfeit  this  paid-up  policy  of  $200  by 
not  dying  within  two  years  !  This  may  be  no  fault  of  his, 
for  perhaps  he  cannot  help  living.  It  may  be  considered  a 
trifling  or  impertinent  question,  but  why  should  not  the  com- 
pany either  pay  the  $200  whenever  the  death  occurs,  having 
received  the  full  value  for  that  insurance,  or  else  give  him  the 
value  of  $84.85  in  insurance  for  the  remaining  portion  of  his 
term  ?  This  would  require,  for  a  single  temporary  premium 
similarly  loaded  with  their  life  premium,  an  addition  to  the 
policy  of  $3,872.84.  It  is  very  true,  and  only  fair  to  say,  that 
this  company's  practice  is  somewhat  better  than  its  principle, 
for  if  at  the  close  of  the  term  policy  the  holder  takes  out  a 
new  policy  for  the  whole  life — which  we  suppose  he  may  do 
if  his  health  is  sufficiently  good — the  company  will  add  to  it 
the  reversionary  dividend  attached  to  the  former  policy. 

We  have  been  the  more  particular  to  call  attention  to  the 
extreme  case  of  these  reversionary  dividends,  in  the  hope  of 
attracting  more  attention  to  the  general  question  of  the  for- 
feiture of  life  policies  by  failure  to  pay  the  periodical  premium 
at  the  time  specified  in  the  policy.  As  we  have  already 
shown,  a  mutual  life  insurance  company  partakes  of  the 
nature  of  a  savings  bank.  Money  is  deposited  to  be  returned  • 
certainly,  but  at  an  uncertain  time.  Therefore,  taking  one 
policy  with  another,  there  must  be  a  long  process  of  accumu- 
lation, and  the  annual  premium  on  a  life  policy,  taken  at  any 


22  Politics  and  Mysteries  of 

age,  must  be  much  larger  than  is  exhausted  in  paying  for  the 
insurance  of  any  one  of  its  earlier  years.  Hence  at  the  close 
of  any  year,  when  the  premium  of  the  next  year  is  clue  and 
not  paid,  there  is  always  in  the  hands  of  the  company  a 
balance  which  it  has  not  earned.  If  the  insured  pays  his 
premium  before  the  last  minute  of  grace  expires,  the  balance 
continues  to  be  his,  and  his  insurance  is  kept  good ;  but  if  he 
does  not,  his  balance  goes  to  the  company,  by  the  conditions 
of  the  policy  and  the  law  of  the  land.  He  may  have  paid  his 
premiums  regularly  for  ten  years  and  have  several  hundreds 
of  dollars  in  the  general  fund,  and  yet  because  one  hundred 
is  not  paid  to-day,  he  may  lose  it  all,  and  what  is  worse,  if 
he  dies,  his  widow  may  receive  neither  the  amount  insured 
nor  the  value  of  his  policy.  It  would  hardly  be  deemed  fair 
to  have  one's  note  protested  in  a  bank  where  he  had  funds 
deposited  to  several  times  the  amount  for  the  express  purpose 
of  paying  it.  Turning  from  the  literal  conditions  of  the 
policy  to  the  reason  and  equity  of  it,  we  shall  see  that  the 
analogy  is  sound,  and  that  a  policy  ought  not  to  become  void 
for  non-payment  of  premium  till  the  sum  already  paid  has 
been  exhausted  in  temporary  insurance,  or  in  other  words, 
till  the  policy  has  no  longer  any  value,  and  nothing  should 
be  forfeited  but  the  right  to  reinstate  it.  It  would  be  penalty 
enough — if  penalty  is  necessary  to  secure  punctuality — to 
have  it  placed  at  the  option  of  the  company  whether  the 
policy  should  be  restored  to  its  character  of  a  whole-life 
policy  by  the  payment  of  the  back  premium  and  interest, 
after  having  sunk  to  that  of  a  temporary  policy  by  an 
omission  of  payment. 

We  do  not  think  it  would  be  a  law  impairing  the  just 
obligation  of  contracts,*  but  quite  the  contrary,  which  should 
enact  that  hereafter  any  policy  issued  by  any  company  char- 

*  The  Act  finally  passed  applies  only  to  policies  issued  after  its  date. 
Some,  if  not  all  the  Massachusetts  companies  have  voluntarily  applied 
it  to  prior  policies. 


Life  Insurance.  23 

tered  by  authority  of  this  Commonwealth,  after  lapse  for  non- 
payment of  premium,  should  nevertheless  be  good  against 
the  company  in  case  of  death,  should  that  event  occur  before 
the  value  of  the  policy,  at  the  time  the  last  premium  was  due 
should  be  exhausted  in  temporary  insurance — the  value  of  the 
policy  and  the  term  of  the  temporary  insurance  to  which  it 
shall  entitle  to  be  deternmined  by  the  rules  adopted  by  the 
Insurance  Commissioners,  allowing  25  per  cent,  of  loading 
on  the  net  temporary  premium.  For  example,  in  the  registry 
in  this  office,  of  policies  in  force  against  the  New  England 
Company,  policy  number  2,893  was  issued  January  2,  1850, 
to  a  person  then  aged  50,  insuring  for  life  $5,000.  Its  net 
value,  as  appears  by  the  registry  on  the  1st  of  November 
last,  was  $1,027.01.  On  the  2d  of  January  last,  when  the 
premium  was  due  and  before  it  was  paid,  the  value  had 
diminished  to  $1,016.68.  If  the  insured  then  paid  the  pre- 
mium of  the  company,  $235,  he  paid,  as  compared  with  the 
net  premium  adopted  for  this  valuation,  $56.12  as  the  "  load- 
ing "  for  expenses,  or  23.88  per  cent,  of  his  premium,  and  the 
balance,  $178.88,  went  to  increase  the  value  of  his  policy, 
which  became  at  once  $1,195.56.  When  the  next  year's 
premium  becomes  due,  January  2, 1860,  the  policy  will  have 
diminished  in  net  value  by  $61.36,  the  net  cost  of  the  year's 
insurance,  which  the  company  has  earned,  and  it  will  be  then 
worth  $1,134.20.  Should  the  holder  fail  to  pay  the  $235  of 
annual  premium  that  day,  he  will  forfeit  to  the  company  the 
$1,134.20,  and  if  he  dies  the  day  after,  his  heirs  will  not  have 
any  legal  claim  to  one  cent  of  the  $5,000.  The  officers  of  the 
company,  as  we  all  know,  if  the  insured  should  seasonably 
request  them,  would  do  everything  in  their  power  to  prevent 
the  lapse,  and  would  not  refuse  to  lend  the  amount  of  the 
premium  on  the  pledge  of  the  policy.  And  after  the  lapse 
they  would  allow  the  policy  to  be  reinstated,  if  the  health 
should  be  good.  But  they  are  under  no  legal  obligation  to 
do  this,  and  should  the  holder  for  any  reason,  or  the  want  of 


24  Politics  and  Mysteries  of 

it,  allow  the  payment  to  be  omitted  and  be  overtaken  by 
death,  the  officers  would  not  feel  themselves  at  liberty,  how- 
ever much  disposed  to  do  it,  to  pay  either  the  loss  or  the 
value  of  the  policy  at  the  time  of  the  lapse,  though,  having 
been  over-paid  by  the  "  loading  "  for  the  expenses.  The  com- 
pany has  no  more  right  in  equity — apart  from  the  letter  of  the 
contract — to  hold  the  net  value  of  the  policy  after  refusing  to 
pay  the  loss,  than  it  has  to  rob  the  house  of  the  deceased  of 
an  equal  sum.  Regarding  the  $1,134.20  as  the  gross  or 
"  loaded  "  single  premium  for  a  person  60  years  of  age,  it  is 
sufficient  to  insure  $5,000  on  his  life  for  the  term  of  six  years 
and  twelve  days,  and  the  company,  not  returning  the  value 
of  the  policy,  would  be  no  loser  by  paying  the  $5,000,  should 
death  occur  at  any  time  within  that  term.  What  we  would 
most  earnestly  recommend  is,  that  the  company  should  be 
obliged  by  law  to  do  it.  Let  the  failure  to  pay  the  premium 
as  stipulated  only  release  the  company  from  the  obligation  to 
insure  beyond  the  time  and  amount  already  paid  for.  Apart 
from  the  consideration  of  justice  to  the  insured,  we  believe 
policies  under  a  legal  provision  of  this  kind  would  be  greatly 
preferred,  and  would  attract  business  to  the  companies 
issuing  them.  Profits  caught  by  the  trap  of  forfeitures  frighten 
away  ten  times  their  amount,  deterring  the  most  prudent 
people  from  running  the  hazard  of  life  insurance. 

In  1870  this  law,  though  somewhat  popular,  had 
become  so  vexatious  to  the  executive  officers  of  the 
companies,  in  several  respects,  that  some  of  them 
applied  to  the  writer  to  aid  them  in  getting  it 
amended.  Having  by  this  time  become  aware  of 
the  mistake  in  the  surrender  charge,  and  having 
always  been  aware,  of  certain  other  troublesome 
imperfections  in  the  law,  he  gladly  undertook  the 
task,  and  drafted  the  bill  which  will  be  found  fur- 


Life  Insurance.  25 

ther  on,  for  fixing  a  cash  surrender  value,  with  an 
adequate  surrender  charge,  as  a  substitute  for 
extended  insurance.  He  understood  the  presi- 
dents of  at  least  two  companies,  to  approve  this 
bill,  and  he  expected  their  aid  in  recommending  it 
to  the  legislature.  But  it  would  have  the  effect  to 
prevent  the  agents  receiving  the  exorbitant  commis- 
sions they  now  do  on  certain  classes  of  policies. 
This  sealed  its  fate.  The  agents  discovered  its  ten- 
dency, and  raised  so  vigorous  a  howl  that  the  pres- 
idents gave  it  no  support,  though  they  exhibited  no 
animosity  towards  it.  In  spite  of  the  active  oppo- 
sition, it  passed  the  House  of  Representatives  by  a 
large  majority.  Its  opponents,  however,  cunningly 
introduced  into  it  an  amendment,  applying  it  to  all 
companies  doing  business  in  the  State  whether  char- 
tered by  it  or  not.  This  brought  to  the  aid  of  the 
opposition  in  the  Senate,  an  immense  reinforcement. 
Judge  McCurdy  of  Connecticut  appeared  as  the 
lobby  representative  of  the  Mutual  Life  Insurance 
Company  of  New  York,  and  produced  great  effect 
by  the  statement  that  Prof.  Bartlett,  the  distin- 
guished actuary  of  that  company,  had  the  subject 
of  "surrender  charge"  in  hand,  and  had  arrived  at 
results  very  different  from  those  of  Mr.  Wright  in- 
corporated in  this  bill.  These  results  would  be 
published  in  due  time,  and  he'begged  the  Senate  to 
postpone  the  subject  till  Prof.  Bartlett's  paper 
should  be  published.  It  was  done,  and  that  paper 


26  Politics  and  Mysteries  of 

has  since  been  published  and  revised.  The  revised 
form  of  it,  with  the  writer's  reply,  will  be  found  on 
subsequent  pages.  Here  follows  the  minority  re- 
port of  the  Insurance  Committee  which  introduced 
the  bill  to  the  House, — a  minority  of  one,  which 
will  not  probably  have  reason  to  be  ashamed  of  its 
report. 

[House  Document,  No.  387, 1871.] 
MINORITY    REPORT. 

The  undersigned,  a  minority  of  the  Committee  on  Insur- 
ance, asks  leave  to  submit  the  accompanying  Report  and 
Bill.  JOHN  NEWELL. 

A  healthy  man  stands  about  8  chances  out  of  1,000  of  dying 
within  one  year  at  the  age  of  27,  about  9  out  of  1,000  at  33, 
about  10  out  of  1,000  at  39,  about  11  out  of  1,000  at  43,  12  at 
45, 13  at  47, 14  at  48,  15  at  49,  16  at  50,  17  at  51,  18  at  52,  30 
at  60,  44  at  65,  65  at  70,  &c.  Hence  it  costs  eight  times  as 
much  to  insure  a  given  sum  for  one  year  at  70  as  at  27. 

If  a  mutual  life  insurance  company  of  several  thousand 
members  could  be  created,  maintained  and  operated  with  no 
other  expense  than  the  payment  of  death-claims,  a  healthy 
man  at  27  would  need  to  pay  only  f  8  to  be  insured  for  $1,000 
for  one  year;  and  at  60  only  f  30  for  the  same.  But  the  man 
at  27  wishes  more  than  one  year's  insurance.  He  does  not 
like  to  have  the  policy  cease  at  a  stipulated  age,  lest  when 
that  time  comes  his  health  should  be  such  that  the  company 
will  refuse  to  renew  the  policy.  Therefore  he  wishes  to  bind 
the  company  to  continue  the  policy  as  long  as  he  pleases  to 
pay  the  premium.  If  ther^e  were  no  necessary  working  ex- 
penses, and  every  member  could  be  depended  on  to  continue 
paying  his  premium  according  to  Agreement  during  his  whole 
life,  the  man  at  27  might  begin  by  paying,  for  $1,000,  f 8  the 


Life  Insurance.  27 

first  year,  a  little  more  the  second,  and  so  on  till  at  33  he 
would  pay  $9,  at  39  $10,  at  70  $65,  and  at  99,  if  he  should  live 
so  long,  he  would  pay  about  $940. 

But  it  is  impossible  to  create  or  maintain  a  life-insurance 
company  large  enough  to  make  anything  sure  without  great 
expense,  and  the  members  cannot  be  depended  on  to  perse- 
vere in  paying  premiums,  especially  increasing  ones,  unless 
they  are  to  forfeit  something  besides  the  right  to  be  insured 
by  ceasing  to  pay.  Hence  the  company  charges  a  person 
aged  27  on  a  policy  for  $1,000  for  the  whole  life,  an  annual 
premium  payable  during  life  of  $15.56  for  the  insurance,  and 
about  $3.89  in  addition  for  expenses,  making  $19.45.  As  to 
the  $15.56,  from  what  has  been  already  said,  it  is  plain  that  it 
will  exceed  the  company's  risk  till  the  age  of  49,  or  22  years. 
If  the  party  reaches  49  alive  there  must  then  be  a  fund  on 
hand  to  the  credit  of  his  policy  of  $256.86.  If  he  dies  that 
year  this  fund  goes  to  help  pay  the  claim  of  $1,000,  so  that 
the  other  members  have  to  pay  only  $743.14. 

In  fact,  in  every  practicable  form  of  insurance  covering  the 
whole  life  or  a  long  term,  the  policy,  historically  considered, 
is  a  combination  of  a  series  of  insurances  by  the  company, 
with  a  series  of  self -insurances,  or  insurances  by  the  party 
himself,  effected  either  by  his  money  or  his  note  in  the  hands 
of  the  company.  According  to  the  Massachusetts  rule  of  re- 
serve, the  relation  of  these  two  insurances,  in  the  successive 
years  of  a  policy  for  $1,000,  entered  at  27,  and  payable  at 
death  whenever  it  may  occur,  will  stand  as  in  the  following 
table.  It  is  assumed  that  no  one  can  live  beyond  the  age  of 
100,  so  that  a  whole-life  policy  becomes  in  fact  an  endowment 
policy,  payable  at  100,  or  previous  death.  Omitting,  for 
brevity's  sake,  the  intermediate  years,  the  first  and  last  years 
during  which  the  policy  may  exist  will  have  the  two  insur- 
ances in  any  year  equal  to  $1,000,  thus : — 


28 


Politics  and  Mysteries  of 


YEAR,      . 

1st 

2<l 

3d 

4th 

5tli 

Insured  by  Co., 
Self-insurance,  . 

$991  76 
8  24 

$983  25 
1675 

$97447 
2553 

$965  40 
34  60 

$956  04 
43  96 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

YEAR,  .  . 

6th 

7th 

8th 

9th 

10th 

Insured  by  Co., 
Self-insurance,  . 

$946  38 
53  62 

$936  41 
63  59 

$926  11 
73  89 

$915  48 
84  52 

$904  50 
95  50 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

YEAR,  . 

68th 

69th 

70th 

71st 

72d 

73d 

Ins.  by  Co., 
Self-ins.,  . 

$85  58 
914  42 

$78  97 
921  03 

$73  84 
926  16 

$67  00 
933  00 

$54  02 
945  98 

$0  00 
1,000  00 

$1,000  00 

$1,000  00|$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

This  relation  of  insurance  to  self-insurance,  it  is  to  be  re- 
membered, is  fixed  by  law.  If  the  same  policy  had  been  pay- 
able at  the  age  of  37  or  previous  death,  the  law  would  fix  the 
relation  of  insurance  to  self-insurance  on  it,  thus : — 


YEAR,  .  . 

1st 

2d 

3d                4th 

5th 

Insured  by  Co., 
Self-insurance,  . 

$919  70 
80  30 

$835  63 
164  37 

$747  57 
252  43 

$655  34 
344  66 

$558  68 
441  32 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

Life  Insurance. 


29 


YEAE,  .  . 

Gill 

7th 

8th 

9th 

lOtli 

Insured  by  Co., 
Self-insurance,  . 

$457  37 
542  63 

$351  13 

648  87 

$239  69 
760  31 

$122  75 
87725 

$0  00 
1,000  00 

#1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

$1,000  00 

If  the  policy,  instead  of  being  payable  to  the  party  himself 
if  alive  at  the  expiration  of  the  term  of  10  years,  were  only 
payable  to  his  representatives  in  case  of  his  death  within  the 
term,  then  the  law  would  fix  the  relation  of  insurance  by  the 
company  to  the  self-insurance,  as  follows : — 


YEAE,      . 

1st 

2d 

3d 

4th 

5th 

Insured  by  Co., 
Self-insurance,  . 

$999  37 
0  63 

$998  85 
1  15 

$998  43 
1  57 

$998  15 
1  85 

$998  01 
1  99 

YEAE,      . 

6th 

7th 

8th 

9th 

10th 

Insured  by  Co., 
Self-insurance,  . 

$998  03 
197 

$998  23 
1  77 

$998  61 
1  39 

$999  21 
0  79 

$1,000  00 
0  00 

If  we  carefully  consider  these  three  contracts, — or  rather 
two,  for  the  first  two  are  substantially  alike, — we  shall  see 
that  it  is  easy  to  calculate,  at  any  point  in  the  history  of 
either,  what  it  may  be  expected  to  contribute,  on  any  assump- 
tions, towards  paying  claims  on  other  policies  during  its  future 
course.  The  present  value  of  all  these  normal  contributions 
to  the  fund  out  of  which  the  death-claims  are  paid,  so  far  as 
the  company,  and  not  the  claimants  themselves,  have  them  to 


30  Politics  and  Mysteries  of 

pay, — may  be  called  the  insurance  value  of  the  policy,  in  dis- 
tinction from  the  reserve  or  "  net  value "  at  the  end  of  the 
policy-year,  which  is  more  appropriately  the  self-insurance 
value. 

For  example,  since  at  27  the  chance  of  dying  in  a  year  is 
about  eight  out  of  1,000,  or  strictly,  by  the  legal  assumption, 
708  out  of  88,434,  the  ten-year  term  policy  which  has  a  risk 
of  $799.37  borne  by  the  company  will  contribute  -$$*  of 
$999.37  to  death-claims  on  other  policies,  or  $8.  If  the  party 
lives  another  year,  his  policy  in  that  year  will  contribute 
^7 14_  Of  |998.85,  or  $8.13.  If  he  lives  a  third  year,  his  pol- 
icy will  contribute  in  that  year  -^f-J^  of  $998.43,  or  $8.26,  and 
so  on. 

On  the  endowment  policy  for  ten  years,  the  contributions 
to  the  death-claims  on  other  policies  in  the  same  three  years 
will  be  ^111^  of  $919.70  the  first  year,  ^Jfo  of  $835.63  the 
second  year,  and  ^-§ &-%  of  $747.57  the  third,  that  is  in  the 
three  successive  years,  $7.36,  $6.90,  and  $6.19.  And  in 
the  same  way  the  first  three  contributions  of  the  whole-life 
policy  will  be  $7.94,  $8,  and  $8.06.  In  the  69th  year  of  the 
whole-life  policy,  if  it  should  exist  so  long,  the  insured  then 
being  95  years  old,  his  policy  will  contribute  to  the  death- 
claims  on  other  policies  |f  of  $78.97,  or  $46.14.  This  is  paid 
thus :  The  net  premium,  $15.56,  is  added  to  the  self-insurance 
fund  of  the  previous  year,  making  $929.98,  which  at  4  per 
cent,  will  amount  to  $967.17,  from  which,  deducting  the  cost 
of  insurance,  $46.14,  we  have  left  $921.03,  the  self-insurance 
of  the  69th  year. 

The  present  value  of  these  normal  contributions  to  pay  the 
death-claims  on  other  policies  is  ascertained  thus :  that  of  the 
current  year  is  simply  discounted  at  the  assumed  rate  of  in- 
terest ;  that  of  the  second  is  multiplied  by  the  present  value 
of  a  dollar  due  in  two  years,  and  the  product  is  multipled  by 
the  fraction  expressing  the  chance  of  the  party  being  alive  to 
contribute  in  the  second  year.  So  of  any  other  possible  con- 


Life  Insurance.  31 

tribution.  Thus  the  present  value  of  the  third  contribution 
of  the  whole-life  policy  will  be  (at  4  per  cent.)  $8.06 X 
•888996XftiH  or  ?7-°2;  and  the  sixty-ninth  contribution 
wiU  be  $46.14X -066,788X^8%!,  or  0.0031.  If  the  present 
values  of  all  the  possible  normal  contributions  towards  the 
death-claims  are  thus  found,  the  sums  of  them  on  the  three 
policies  above  stated  will  be  as  follows :  whole  life,  $189.40 ; 
ten-year  endowment,  $34.69;  ten-year  term,  $76.86.  These 
numbers  appear  as  nearly  as  possible  to  measure  the  relative 
value  of  these  three  policies  at  the  start  to  the  company  as  an 
insurance  company.  They  also  measure  relatively  the  inter- 
ests the  several  policy-holders  have  in  the  enlargement  and 
maintenance  of  the  company  as  an  insurance  company.  The 
annual'  premium  paid  for  the  whole-life  policy  of  f  1,000,  at  27, 
is  usually  $20.93,  for  the  ten-year  endowment  policy,  $104.16, 
and  for  the  ten-year  term  policy — in  case  such  a  policy  is 
taken — $13  or  $14.  Nothing  can  be  more  obvious  than  that 
if  these  policies  are  made  to  contribute  to  the  working  ex- 
penses of  the  company,  that  is,  to  other  expenses  than  the 
payment  of  policy-claims,  in  the  ratio  of  their  premiums,  that 
a  gross  injustice  is  done  to  at  least  two  of  them,  and  especially 
to  the  endowment  policy.  Suppose  the  company,  as  often 
happens,  has  really  consumed  20  per  cent,  of  its  premium  re- 
ceipts in  expenses  outside  of  policy-claims.  Then  if  these 
expenses  are  assessed  on  the  premiums,  the  holder  of  the  en- 
dowment policy  is  made  to  pay  $20.83  to  the  life-policy  hold- 
ei°s  $4.19 ;  that  is,  he  will  have  to  pay  a  great  deal  more  to 
sustain  the  company  as  an  insurance  company,  while  his  in- 
terest in  it  as  such  is  less  than  one~fifth  of  that  of  the  life- 
policy  holder.  It  is  true,  his  interest  in  the  company  as  a 
savings  bank  is  greater,  and  precisely  in  the  ratio  of  $80.30  to 
$8.24,  if  both  policies  are  in  their  first  year,  and  of  $1,000  to 
$95.90  if  both  are  in  their  tenth  year.  A  savings  bank  will  do 
pretty  well  if  its  management  does  not  cost  over  one-hall 
per  cent,  on  the  deposits,  but  it  would  not  be  -much  patron- 


32  Politics  and  Mysteries  of 

ized  if  it  cost  over  one  per  cent.,  and  certainly  not  at  all  if 
the  expenses  were  more  than  the  interest.  Now  supposing 
we  assess  one  per  cent,  on  savings  bank  deposit  or  self-insur- 
ance, the  life-policy  will  pay  on  that  amount  eight  cents,  and 
the  endowment  eighty  cents,  both  being  in  their  first  year. 
This  will  leave  $24.14  to  be  assessed  on  their  interest  in  the 
company  as  an  insurance  company,  that  is,  to  be  divided  in 
the  ratio  of  $  189.40  to  $34.69,  which  will  throw  $20.40  on  the 
life-policy,  and  $3.74  on  the  endowment,  thus  making  the  life 
policy's  share  of  the  expenses  $20.48,  and  the  endowment 
policy's  $4.54.  Supposing  both  policies  in  their  tenth  year, 
one  per  cent,  on  the  respective  savings  bank  deposits  that 
year  would  be  $10  for  the  endowment  policy,  and  95  cents  for 
the  life  policy,  leaving  $13.19  to  be  assessed  on  the  insurance 
values,  which  are  0  on  the  endowment,  and  $200.65  on  the 
life.  Hence  the  endowment  policy  in  its  last  year,  having  no 
interest  any  longer  in  the  company  as  an  insurance  company, 
but  only  as  a  savings  bank,  should  pay  only  the  $10,  and  the 
life  policy  should  pay  0.95-|-13.19— 14.14.  Thus  supposing 
the  amount  of  the  expense  $25.02  for  these  two  policies  to  be 
the  correct  thing,  the  endowment  policy  is  overcharged  $17. 09 
the  first  year  and  $10.83  the  last.  But  the  expense  would  un- 
doubtedly have  been  somewhat  less  than  $25.02  chargeable 
to  the  two  policies,  but  for  the  unreasonable  practice  of  allow- 
ing the  agent  a  commission  on  the  premium,  rather  than  on 
the  insurance  value,  which  is  the  true  measure  of  the  value  of 
the  policy  to  the  company,  as  an  insurance  company.  These 
insurance  values  being  at  the  outset  in  the  ratio  of  $189.40  to 
$34.69,  if  the  company  could  not  afford  to  give  more  than  40 
per  cent,  of  the  first  premium  to  procure  the  life  policy  (and 
considering  the  rate  at  which  policies  lapse,  it  does  not  give 
much  more  than  this  when  it  gives  15  per  cent,  on  the 
first  premium  and  seven  and  a  half  per  cent,  on  each  suc- 
ceeding one) ,  then  it  can  afford  to  give  no  more  than  one  and 
a  half  per  cent,  of  its  first  premium  to  get  the  endowment 


Life  Insurance.  33 

policy.  In  other  words,  if  the  life  policy  is  worth  to  the  com- 
pany as  an  insurance  company,  but  $8.37,  the  endowment 
policy  is  worth  only  $1.53,  these  sums  being  nearly  propor- 
tioned to  the  present  values  of  what  the  two  policies  may  be 
expected  to  contribute  towards  the  payment  of  claims  on  others. 
Again,  if  the  $25.02  is  assessed  on  the  premiums,  so  that 
the  life  policy  pays  $4.19  and  the  endowment  $20.83,  it  will 
readily  appear  that  this  is  equivalent  the  first  year,  to  assess- 
ing the  savings  bank  deposit  over  25  per  cent.  Thus, — 


Life  Policy. 

Endowment 
Policy. 

Savings  bank  deposit,    
Insurance  value,     

$8  24 
189  40 

f  80  30 
34  69 

To  produce  the  $4.19  for  the  life  policy  and  $20.83  on  the 
endowment  by  a  percentage  on  the  deposit  and  another  per- 
centage on  the  insurance  value,  both  percentages  being  the 
same  for  both  policies,  will  require  the  percentage  of  deposit 
to  be  25.46,  and  that  on  insurance  value  to  be  1.1046.  Ap- 
plying these  percentages  to  the  life-policy  deposit  and  insur- 
ance value,  we  have — 

On  savings  bank  deposit, $2  10 

insurance  value, 2  09 


$4  19 

And  applying  the  same  percentages  to  the  deposit  and 
insurance  value  of  the  endowment  policy  we  have, — 

On  savings  bank  deposit, $20  45 

insurance  value, 38 

$20  83 
2* 


34  Politics  and  Mysteries  of 

It  does  not  seem  necessary  to  pursue  this  line  of  illustration 
any  further  to  show  the  entire  absurdity  of  assessing  expenses 
on  the  premiums,  when  in  all  practical  cases  they  consist  of 
two  distinct  parts,  never  bearing  a  constant  ratio  to  each 
other,  either  in  different  years  of  the  same  policy,  or  the  same 
year  of  different  policies.  It  is  also  plain  that  time,  the  future 
as  well  as  the  present  of  any  contract,  must  be  taken  into 
account.  The  share  which  any  policy  has  in  the  accumulated 
fund  is  a  known  quantity,  and  cannot  be  justly  dealt  with 
on  principles  that  could  not  be  tolerated  in  a  savings  bank. 
The  share  which  it  has  in  the  company  as  an  insurance 
company  embraces  all  the  possible  future  years  covered  by 
the  policy  as  well  as  the  present,  and  is  as  calculable  as  the 
reserve  or  the  premium.  The  whole  strength  of  a  company 
as  an  insurance  company  consists  of  the  aggregate  of  these 
shares.  The  only  damage  done  to  a  company  by  the  retire- 
ment of  a  member  is  the  diminution  of  its  insurance  strength 
thereby.  This  is  very  nearly  in  proportion  to  the  insurance 
value  subtracted,  and  would  be  exactly  so  if  policies  were  all 
of  the  same  amount.  It  will  be  readily  seen  why  a  company 
can  a  little  better  afford  to  lose  a  given  amount  of  insurance 
value  on  one  life  than  on  two.  It  has  no  relation  whatever 
to  the  self-insurance  fund  withdrawn.  Suppose  at  the  end  of 
five  years  the  three  policies  above  explained  should  withdraw. 
Relatively  to  each  other  the  insurance  strength  they  will  sub- 
tract by  withdrawing  will  be, — 

Whole-life  Policy, $192  60 

Ten-year  Endowment  Policy,    .        .        .        .        .        13  74 
Ten-year  Term  Policy, 46  14 

The  self-insurance  fund  on  each  policy  at  the  same  date  is, 

Whole-life  Policy, $43  96 

Ten-year  Endowment  Policy, 441  32 

Ten-year  Term  Policy,      .        .        .        .        .        .          1  99 


Life  Insurance.  35 

It  is  considered  by  most  sound  and  conservative  companies 
extravagant  to  give  for  a  whole-life  policy  a  brokerage  of  more 
than  forty  per  cent,  of  its  first  premium,  and  this  would  not 
be  more  than  six  per  cent,  of  its  insurance  value.  Hence 
after  paying  a  surrender  charge  of  $11.56,  or  sufficient  to  pro- 
cure another  policy  restoring  the  full  insurance  strength  to 
the  company,  the  policy-holder  may  be  allowed  to  retire, 
withdrawing  his  deposit  of  $43.96.  Hence  the  surrender 
value  of  his  policy  is  $43.96— $11.56=$  32.40.  The  surrender 
value  of  the  endowment  policy  on  the  same  principles  is 
$441.32 — .82m$440.50.  But  the  term  policy  has  no  surrender 
value,  because  the  surrender  charge  is  $2.77,  which  exceeds 
the  self-insurance  fund  or  deposit  of  $1.99.  In  the  same  way 
the  life  policy  would  have  no  surrender  value  at  the  end  of 
the  first  year  because  the  surrender  charge  would  exceed  the 
deposit.  In  other  words  if  it  costs  six  per  cent,  of  its  insur- 
ance value  to  obtain  a  policy,  it  is  not  worth  obtaining  unless 
it  has  or  will  soon  have  deposit  or  self-insurance  value  enough 
to  refund  this  cost  in  case  of  discontinuance.  This  can  never 
be  the  case  with  short-term  policies,  and  this  is  the  reason 
why  the  companies  are  so  much  less  anxious  to  obtain  this 
class  of  business.  Long-term  endowment  policies — including 
ordinary  life  policies — may  not  have  a  self-insurance  value 
the  first  year  equal  to  the  cost  of  obtaining  them,  and  if  all 
of  them  lapsed  at  the  end  of  the  first  year  the  company 
would  sustain  a  loss  on  them.  But  if  only  twenty  per  cent, 
of  them,  as  is  usual,  fail  to  pay  the  second  premium,  the  loss 
on  that  portion  may  be  more  than  compensated  by  the  insur- 
ance value  of  the  other  80  per  cent,  which  persist.  There  is 
good  reason  here  for  two  practical  rules :  first,  not  to  give  the 
agent  out  of  the  first  premium  so  much  that  the  company  can 
lose  anything  if  the  second  should  not  be  paid.  Second,  not 
to  take  any  part  of  the  first  premium  in  note,  and  not  after- 
ward to  take  so  much  in  a  note  that  the  outstanding  notes  can 
ever  exceed  the  cash  surrender  value  of  the  policy. 


36  Politics  and  Mysteries  of 

Taking  for  granted  that  the  present  legal  requisition  for 
reserve  is  correct,  it  will  be  apparent  that  the  proposed  act, 
giving  the  policy-holder  a  right,  at  the  end  of  any  policy-year, 
to  withdraw  his  savings  bank  deposit  or  self-insurance,  less 
six  per  cent,  of  the  insurance  value  of  his  policy,  presents 
two,  and  only  two,  questions : — 

1.  Whether  insurance  value  is  the  proper  base  of  surrender 
charge. 

2.  Whether  six  per  cent,  is  sufficient  to  keep  the  company 
whole.    In  other  words,  whether  such  a  percentage  will  re- 
place the  business. 

It  cannot  be  apprehended  that  any  company  will  put  in  a 
plea  for  any  other  base  than  insurance  value,  and  least  of  all, 
that  any  one  will  attempt  to  justify  the  deposit  itself  as  that 
base.  It  appears  to  be  an  inevitable  conclusion  from  the  po- 
sition already  assumed  by  Massachusetts  law,  requiring  re- 
serve by  a  certain  rule,  that  insurance  value,  as  above  defined, 
is  the  true  basis  of  surrender  charge.  The  deduction  from 
the  deposit  to  indemnify  the  company  must  be  a  percentage 
of  its  loss  of  this,  and  it  must  be  a  maximum  percentage  for 
the  most  perfectly  insurable  lives.  If  the  law  allows  this 
charge  in  every  case,  the  company  is  injured  in  none,  for  it 
thus  retains  out  of  the  deposit  enough  to  pay  for  fully  repair- 
ing the  breach  in  its  insurance  resources.  It  must  be  dis- 
tinctly borne  in  mind  that  the  self-insurance  or  savings-bank 
deposit  of  any  member  is  not,  under  our  law,  whatever  it 
may  be  under  English  law  or  want  of  law,  an  insurance  re- 
source. It  cannot  be  touched — as  an  average  fact— rand  the 
premiums  are  so  large  that  it  never  needs  to  be  touched,  ex-* 
cept  for  the  claim  on  the  policy  itself. 

It  only  remains  to  consider  whether  six  per  cent,  of  the 
insurance  value  is  sufficient.  It  will  certainly  not  be  suffi^ 
cient  to  pay  for  procuring  short-term  endowment  policies,  at 
the  rates  now  paid  for  that  class  of  business.  But  for  life 
policies,  considering  that  it  requires  nothing  to  be  taken  out 


Life  Insurance.  37 

of  the  premium  itself,  it  surely  ought  to  be  sufficient,  being 
equal  to  from  30  to  60  per  cent,  of  the  premium.  Let  us  sup- 
pose a  mutual  company  having  $12,000,000  insured,  the  in- 
surance value  of  which  is  $2,700,000,  and  the  savings  bank 
deposit  or  self-insurance  is  $1,400,000.  If  under  the  proposed 
law  every  member  should  withdraw,  there  would  be  left  in 
the  hands  of  the  officers  $162,000.  But  our  law  deems 
$100,000  sufficient  to  build  a  new  company  with.  And  new 
companies  have  been  started  successfully  with  that  amount 
to  be  returned  with  its  interest  when  it  should  be  no  longer 
needed.  But  in  our  reconstructed  company  the  $162,000 
would  not  have  to  be  returned,  being  a  pure  bequest  from  the 
self-defunct  company  that  preceded  it.  The  new  company 
could  have  no  just  reason  to  complain  of  the  old  one  for 
carrying  with  it  $1,238,000  of  its  own  money. 

The  benefit  to  the  company  of  such  a  law  is  that  men  will 
be  more  ready  to  take  policies  when  they  know  that  they  can, 
should  circumstances  change,  at  any  time  retire  on  equitable 
terms.  Other  contingencies  belong  to  human  life  besides  the 
time  of  its  cessation.  The  motive  or  necessity  for  insurance 
may  cease  at  any  time.  The  insurable  interest  is  almost  sure 
to  cease  between  70  and  80,  should  life  last  so  long.  Of  nearly 
all  the  policies  that  can  be  supposed  to  enter  that  decade,  it 
must  become  desirable  that  they  should  be  equitably  settled 
within  it,  even  if  death  should  not  occur.  In  point  of  fact, 
tinder  the  most  unfavorable  circumstances  for  equitable  sur- 
render, or  in  other  words  when  surrender  has  to  bo  effected 
on  terms  always  inequitable,  the  average  life  of  the  whole- 
life  policy  has  been  found  to  be  not  one-half  of  the  expecta- 
tion of  life  at  the  age  of  entry.  This  shows  that  in  numerous 
cases  the  maintenance  of  the  policy  becomes  undesirable. 
Yet  notwithstanding  this  urgent  demand  for  it,  neither  the 
law  nor  the  companies  have  ever  provided  any  equitable 
method  of  getting  out  of  this  life  contract. 

Life  insurance  has  flourished  in  England  for  a  century  or 


Politics  and  Mysteries  of 


more  without  fixing  on  any  uniform  or  intelligible  principle 
the  surrender  value  of  a  policy.  The  practice  may  be  said 
to  be  to  exact  as  a  surrender  charge  a  variable  part  of  the 
Self-insurance,  but  always  sufficient  to  border  on  robbery. 
That  the  surrender  value  paid  there,  even  by  the  best  com- 
panies, is  atrociously  too  low,  is  abundantly  proved  by  the 
regular  sale  of  old  policies  at  auction  in  the  London  Ex- 
change, where  they  seldom  bring  more  than  half  the  reserve 
or  savings  bank  deposit  which  must  exist  in  the  company. 
As  a  proof  of  this  deplorable  traffic,  take  the  following  adver- 
tisement cut  from  the  "  London  Daily  News,"  of  February  6, 
1871  :— 

"  IMPORTANT  SALE  OF  42  OLD  LIFE  POLICIES  AND  EEVERSIONS. 

"  By  order  of  the  Executors  of  a  Gentleman  deceased. 

"  Messrs.  Broad,  Pritchard  and  Wiltshire  are  instructed  to 
sell  by  auction,  at  the  New  Mart,  Tokenhouse  Yard,E.  C.,  to- 
morrow, February  7,  at  1,  precisely,  in  42  lots,  the  following 
valuable  Old  Life  Policies,  effected  in  the  most  substantial 
London  offices,  offering  to  life  offices,  reversionary  societies, 
capitalists  and  others  a  first-class  opportunity  of  investing ; — 


<M 

f  * 

: 

13 

A 

3  ^ 

® 

NAME  OF  COMPANY. 

1? 

1 

o   •§ 

li 

£ 

Pi 

CO 

GO 

1844 

Law  Life, 

48 

£22  13    4 

£314    0  0 

£1,000 

1834 

Law  Life, 

64 

25  10  10 

584    0  0 

.1,000 

1829 

Law  Life, 

78 

31    8    4 

926    0  0 

1,000 

1846 

Law  Life, 

60 

30  13    4 

324    0  0 

1,000 

1839 

Law  Life, 

57&52* 

15  15    8 

258    0  0 

400 

1834 

The  Mutual, 

77 

34    6    8 

808    0  0 

1,000 

1838 

The  Mutual, 

66 

13  18    4 

315    0  0 

500 

1837 

Law  Life, 

69 

122  13    4 

2,198    0  0 

4,000 

1827 

The  Equitable 

76 

28  11    0 

965    0  0 

1,000 

1840 

The  London  Assurance 

68 

30  15  10 

_ 

1,000 

1834 

The  Amicable, 

77 

16  17    6 

67  10  0 

500 

1824 

Norwich  Union, 

67 

639 

90    0  0 

300 

1829 

The  Mutual,   . 

87 

539 

186    0  0 

250 

f  Joint  lives. 


Life  Insurance. 


39 


p 

NAME  OP  COMPANY. 

t| 

**  3 

jh 

f 

ji 

1* 

1837 

The  Economic, 

78 

£26  14    2 

_ 

£500 

1835 

Law  Life, 

57 

22  13    4 

£515    0  0 

1,000 

1838 

The  Minerva,  . 

83 

920 

113    0  0 

200 

1838 

The  Sun, 

76 

18  16    3 

124    0  0 

500 

1833 

The  Alliance,  . 

70 

16  13    4 

230    0  0 

1,000 

1840 

The  Equitable, 

60 

21    7    0 

478    0  0 

800 

1843 

The  Westminster, 

52 

34  10    0 

195    0  0 

1,500 

1829 

The  Imperial,  . 

79 

12  18    0 

113    0  0 

410 

1843 

The  Atlas, 

72 

17  18    9 

235    0  0 

500 

1832 

The  Crown,     . 

75 

8  19    6 

100    0  0 

300 

1841 

The  Sun, 

64 

26    8    6 

205    0  0 

1,000 

1841 
1831 

The  Sun, 
The  Rock, 

64 

70 

26    8    6 
27    5  10 

205    0  0 
698    0  0 

1,000 
1,000 

1843 

The  Victoria,  . 

58 

12  12    9 

113    0  0 

500 

1825 

The  Guardian, 

80 

2  17    - 

35    0  0 

100 

1839 

The  Mutual,   . 

71 

17  18    8 

349    0  0 

525 

1844 

The  Mutual,   . 

77 

11  17    1 

170    0  0 

250 

1859 

The  Victoria,  . 

47 

7  19    6 

_ 

300 

1855 

Liverpool  and  London, 

44 

12  15    0 

80    0  0 

500 

1859 

Liverpool  and  London, 

44 

10  10    0 

83    0  0 

500 

1852 

The  Union,     . 

66 

12    9    0 

76    0  0 

300 

1852 

The  European, 

72 

16  10    9 

- 

300 

1858 

The  Britannia, 

54 

7  10    5 

_ 

500 

1825 

The  Atlas, 

69* 

- 

- 

750 

1866 

The  Gresham, 

38 

5  13    2 

_ 

200 

1867 

The  Gresham, 

38 

5  16    6 

_ 

200 

1868 

The  Gresham, 

38 

5  16    6 

_ 

200 

1868 

The  Gresham, 

38 

5  16    6 

_ 

200 

1846 

Law  Life, 

73f 

16  10    9 

499    0  0 

"  The  absolute  reversion  to  the  sum  of  £1,000  sterling,  re- 
ceivable on  the  death  of  a  lady  now  aged  66  years,  secured 
upon  real  estates  in  the  county  of  Oxford. 

"  Particulars  and  conditions  of  sale  may  be  had  of  Messrs. 
Pawle  and  Fearon,  Solicitors,  11, 'New-inn;  of  Messrs.  Rick- 
ards  and  Walker,  Solicitors,  29,  Lincoln's-inn-fields,  W.  C. ; 
of  Alfred  Watson,  Esq.,  Solicitor,  12,  Fenchurch-street,  E.  C. ; 
at  the  Mart ;  and  of  the  auctioneers,  28,  Poultry,  E.  C." 


*  Policy  and  reversion. 

t  The  life  interest  of  the  last  life  is  the  sum  of  £2,736  16s.  lid. 


40  Politics  and  Mysteries  of 

English  law,  to  prevent  speculation  or  gambling  on  human 
life,  does  not  allow  a  policy  to  be  issued  without  an  insurable 
interest  at  the  start,  but  it  allows  it  to  be  maintained  after  the 
insurable  interest  has  ceased  to  exist,  and  to  be  transferred 
for  a  consideration  to  a  third  party,  who  may  maintain  it  as  a 
matter  of  pure  speculation,  thus  having  a  pecuniary  interest 
to  be  advanced  by  the  death  rather  than  the  life  of  the  party 
insured.  This  was  undoubtedly  the  case  with  this  "  gentle- 
man deceased,"  who  had  picked  up  these  forty-two  old  life 
policies  at  auction,  bidding  a  little  more  for  them  than  the 
surrender  values  which  the  companies  were  willing  to  pay. 
It  would  be  interesting  to  know  how  much  this  gentleman 
gave  for  these  policies  and  how  much  he  would  have  been 
grieved  if  any  of  the  insured  had  died  between  the  date  of 
the  purchase  and  that  of  his  own  death.  Translating  pounds 
into  dollars,  we  know  that  his  interest  in  the  immediate  ter- 
mination of  the  forty-two  old  lives  was  $192,782,  which  the 
companies  were  ready  and  able  to  pay.  on  proof  of  death.  So 
far  as  we  know,  not  one  of  the  insured  could  benefit  him  a 
shilling,  or  be  anything  but  an  expense  to  him,  by  continuing  v 
to  live.  His  annual  expense  on  them,  all  alive,  was  $3,825.80. 
Surely  this  deceased  must  have  been  very  much  of  a  "  gen- 
tleman "  while  he  lived  if  his  extensive  speculation  in  life 
policies  did  not  occasion  some  uneasiness  or  nervousness 
among  these  forty-two  persons,  most  of  them  'old  enough  to 
have  nerves. 

The  chief  point  of  interest  in  regard  to  this  lot  of  policies 
is  their  market  value  as  compared  with  their  self-insurance 
value.  The  latter  at  3  per  cent,  would  be  $113,713,  and  at  4 
per  cent.  $105,725.  The  insurance  value  of  the  whole  would 
be  at  4  per  cent.  $37,679.40 ;  and  considering  6  per  cent,  of 
this  a  sufficient  surrender  charge,  we  have  $105,725 — 
$2,260.76— $103,464.24,  as  what  the  companies  could  afford  to 
give  on  the  surrender  of  these  policies,  if  they  had  no  more 
than  a  4  per  cent,  reserve.  What  they  may  have  cost  the 


Life  Insurance.  41 

"  gentleman  deceased,"  supposing  he  had  bought  them  just 
before  he  died,  with  no  premiums  paid  since,  is  quite  another 
matter.  An  article  in  the  "  British  Assurance  Magazine  "  for 
October,  1862,  in  discussing  the  market  value  of  life  insur- 
ance policies,  gives  from  £119  4s.  to  £332  14s.  as  the  price 
which  may  properly  be  paid  for  a  policy  of  £1,000  entered  at 
20  and  having  paid  40  annual  premiums  of  £17  5s.  10d.,  and 
of  which  the  self-insurance  value  at  4  per  cent,  would  of 
course  be  £564  10s.  lid.  This  would  be  equivalent  to  a  sur- 
render charge  varying  from  28.38  per  cent,  to  74.33  per  cent, 
of  the  self-insurance  value.  We  may  therefore  well  suppose 
that  42  such  old  policy-holders  having  in  British  offices  poli- 
cies in  which  their  self-insurance  fund  is  f  105,725,  and  on 
which  they  ought  to  realize  in  cash  about  $103,464.24,  can- 
not get  on  the  average  so  much  as  half  that  sum  from  the 
companies,  but  do  obtain  it  in  the  auction  mart  out  of  tfee 
speculative  proclivities  of  Hebrew  or  other  gentlemen.  This 
seems  to  be  a  state  of  things  greatly  to  be  avoided,  and 
which  is  utterly  inconsistent  with  the  cherished  idea  of  our 
own  companies,  that  they  are  to  a  great  extent  savings  banks. 

No  man  at  the  outset  of  active  life,  the  time  when  he  most 
needs  insurance,  can  say  what  his  circumstances  will  be  afttr 
thirty  years  or  even  ten  years.  A  system  by  which  he  can  he 
insured  beyond  a  peradventure  while  he  continues  to  desire  it, 
and  by  which  he  can  retire  when  he  ceases  to  desire  it,  without 
having  paid  for  much  more  than  he  has  had,  will  have  almost 
double  the  value  of  the  present  loose  system,  in  which  no  one 
can  know  beforehand  on  what  terms  he  can  retire,  and  in 
which  he  is  sure  to  pay  more  towards  the  working  expenses 
of  the  company  the  less  he  is  to  be  insured  by  it. 

The  appended  bill  is  designed  to  secure  to  every  holder  of 
any  policy  hereinafter  issued  the  right  to  retire  from  the  com- 
pany whenever  he  chooses,  on  equitable  principles,  and 
whenever  it  can  be,  consistently  with  justice  to  the  company, 
to  receive  a  cash  surrender  value  which  can  be  known  at  the 


42  Politics  and  Mysteries  of 

time  he  takes  the  policy.  The  companies  are  now  exceed- 
ingly injured  in  reputation,  if  not  in  funds,  by  the  groundless 
complaints  of  those  who  retire  after  paying  one  or  two  pre- 
miums, very  much  dissatisfied  because  the  whole  of  their 
premiums  is  not  returned.  A  law  fixing  a  just  surrender 
value  would  prevent  all  this.  The  present  law  to  regulate 
the  forfeiture  of  policies  does  not  at  all  meet  the  case  of 
those  who  have  ceased  to  need  further  insurance. 

The  "non-forfeiture  law"  (chapter  186  of  the  Acts  of 
1861)  is  defective  in  two  respects : 

1.  It  protects  some  policy-holders  too  much,  and  others  too 
little  or  not  at  all. 

2.  IA  all  cases  where  the  party  is  insurable  at  the  time  of 
the  lapse,  there  ought  to  be  no  deduction  of  foreborne  pre- 
miums from  the  claim. 

These  defects  have  been  vastly  increased  in  importance  by 
the  great  increase  of  endowment  policies,  to  which  when  the 
term  of  the  endowment  is  short,  the  law  affords  little  protec- 
tion. That  law  has,  in  fact,  almost  no  merit  except  that  it 
means  well.  At  the  time  of  its  adoption  there  was  nothing 
whatever  to  prevent  a  confiscation  by  the  company  of  the 
whole  of  the  self-insurance  value  or  savings  bank  deposit  on 
a  policy,  if  a  premium  should  fail  to  be  paid  when  due.  This 
was  very  hard  on  policy-holders  who  had  paid  a  number  of 
premiums  in  cash,  and  thus  had  in  the  company  a  cash  de- 
posit sufficient  to  pay  for  nearly  as  many  more  years  of  in- 
surance as  they  had  paid  premiums.  Moreover,  it  was  obvi- 
ously and  admittedly  inequitable,  because  many  of  the  best 
companies  allowed  the  greater  part  if  not  the  whole  of  this 
deposit,  at  the  option  of  the  insured,  to  remain  in  his  hands 
in  the  shape  of  an  interest-bearing  note,  and  in  that  case  if  he 
forfeited  his  policy,  he  forfeited  little  or  nothing  more  than 
his  right  to  be  insured  further,  on  his  paying  for  it.  But  so 
far  as  this  deposit  consisted  in  cash,  the  company  had  the 
policy-holder  bound  to  forfeit  insurance  for  which  he  had 


Life  Insurance.  43 

already  paid.  There  could,  of  course,  be  no  equity  in  doing 
worse  by  those  policy-holders  who  had  paid  all  cash  than  by 
those  who  had  paid  a  part  in  notes,  and  there  could  be  no 
justice  in  refusing  to  give  as  much  insurance  as  had  been 
paid  for  in  cash.  By  the  law  the  State  simply  intended  to 
effect  this  equity  and  this  justice  in  regard  to  all  policies 
thereafter  issued  by  corporations  of  its  own  make.  But  it 
failed  to  a  very  considerable  and  wholly  unnecessary  extent 
by  the  two  provisions  above  named,  to  wit,  deducting  one- 
fifth  of  the  net  cash  value  from  the  premium  for  temporary 
insurance,  and  the  forborne  premiums  with  interest  from  the 
claim. 

The  effect  of  the  first  deduction  is  not  to  allow  the  com- 
pany a  sufficient  compensation  for  the  loss  of  a  valuable 
contract,  where  an  ordinary  life  policy,  entered  under  the 
age  of  50,  lapses  before  paying  its  second  or  sometimes  its 
third  premium,  and  to  allow  it  many  times  too  much  if  it 
lapses  after  paying  many  premiums.  The  note-premium 
companies  could  not  well  object  to  this,  because  they  took 
more  than  five-fifths  of  the  net  value  of  the  policy  at  the 
end  of  the  first  year  in  a  note  at  the  beginning  of  it,  whereas 
in  point  of  equity,  as  between  part-note  and  all-cash  payers, 
they  should  never  have  taken  any  part  of  the  first  premium 
in  note.  In  other  words,  whenever  it  will  require  the  whole 
of  the  net  value  of  any  policy  at  the  end  of  the  policy  year 
to  replace  it,  if  it  should  lapse,  no  part  of  the  premium  at  the 
beginning  of  the  year  should  be  received  in  note.  As  a 
general  and  almost  universal  rule  it  costs  money  to  get  every 
policy  into  the  company,  and  as  much  as  the  net  value  at  the 
end  of  the  first  year,  in  case  of  an  ordinary  life  policy,  entered 
under  about  50.  This  is  not  charged  on  the  policy  obtained 
as  long  as  it  stays  in  the  company.  The  addition  is  a  benefit 
to  the  whole  company,  and  the  whole  company  pays  for  it. 
But  if  the  party  wishes  to  retreat  from  his  bargain,  nothing 
can  be  plainer  than  that  he  ought  to  indemnify  the  com- 


44  Politics  and  Mysteries  of 

pany  for  the  loss  it  sustains  in  losing  him.  In  other  words, 
he  ought  to  pay  enough  to  make  his  place  good.  Take  for 
example  a  $1,000  policy  for  life,  entered  at  30.  The  net 
value  of  it  at  the  end  of  the  first  year  is  $9.30,  one-fifth  of 
which  is  $1.86,  or  less  than  9  per  cent,  of  the  first  premium, 
whereas  it  costs  from  15  to  40  per  cent,  of  the  first  premium 
to  obtain  the  policy.  And  if  the  company,  having  paid  what 
it  has  paid  for  obtaining  new  business,  had  paid  for  obtain- 
ing each  policy  in  the  strict  ratio  of  its  value  when  obtained, 
that  is,  its  insurance,  value,  it  would  have  unquestionably 
paid  more  than  $9.30  for  this  one.  For  example,  we  will 
suppose  it  actually  paid  only  $3.18  out  of  the  first  premium 
to  obtain  this  policy,  of  which  the  first  premium  was  $21.21, 
and  that  it  paid  $15.21  for  obtaining  a  $1,000  ten-year  en- 
dowment policy,  entered  at  the  same  age,  of  which  the  first 
premium  was  $101.44,  thus  paying  $18.39  for  both  policies. 
Inasmuch  as  the  relative  values  of  these  two  policies,  are  , 
as  $198  for  the  life,  to  $35.56  for  the  endowment,  if  the 
$18.39,  had  been  paid  for  the  two  according  to  their  value 
to  the  company,  as  an  insurance  company,  $15.60  would 
have  been  given  to  obtain  the  life  policy,  and  $2.79  only 
to  obtain  the  endowment  policy.  It  must  be  plain  enough 
from  this  that  one-fifth  of  the  net  value  at  the  end  of  the 
year,  in  case  of  the  life  policy,  is  not  a  sufficient  compensa- 
tion to  the  company  for  the  loss  of  insurance  value  by  the 
lapse.  It  is  very  different  with  the  endowment,  where  the 
insurance  value  to  be  lost  is  not  one-fifth  as  great,  and  the 
net  value  at  the  end  of  the  first  year  is  eight  times  as  great. 
If  the  endowment  policy  lapses  after  one  payment,  the  law 
allows  the  company  a  compensation  of  $16.04  for  a  loss  of 
insurance  value  which  has  now  become  only  $30.64,  while 
for  the  life  policy  it  allows  only  $1.86  for  a  loss  of  insur- 
ance value  which  has  now  become  $199.20. 

In  substituting  term  insurance  for  the  original  policy,  as 
the  law  does,  in   case  of  lapse,  the  company  never  loses 


Life  Insurance.  45 

quite  the  whole  of  the  insurance  value.  It  loses  nearly  the 
whole  of  it  on  an  ordinary  life  policy  which  lapses  after 
only  one  premium  is  paid.  And  in  this  case,  where  it  loses 
the  most,  the  compensation  is  the  least.  In  the  case  of  the 
endowment  policy  at  30,  lapsing  the  .first  year,  after  deduct- 
ing one-fifth  of  the  net  value,  there  is  $64.15  left,  which  will 
pay  for  a  term  policy  for  over  eight  years,  and  the  insur- 
ance value  of  this  is  f  51.70.  That  is,  the  company  has  been 
paid  $16.04  to  compensate  it  for  the  loss  of  $30.64  of  insur- 
ance value,  whereas,  after  deducting  this  from  the  net  value, 
the  term  insurance  substituted  by  the  law  more  than  replaces 
the  insurance  value  by  $21.06. 

After  an  ordinary  whole-life  policy  has  paid  a  number  of 
premiums,  the  deduction  of  one-fifth  from  its  net  value  at 
the  time  of  lapse,  also  becomes  an  extravagant  compensa- 
tion for  the  loss  of  the  company.  Such  a  policy,  if  taken 
under  the  age  of  57,  increases  a  little  in  regard  to  insur- 
ance value  till  the  party  reaches  that  age,  after  which  the 
insurance  value  diminishes.  For  example,  a  life  policy 
entered  at  30,  with  an  insurance  value  of  $198  at  the  out- 
set, has  an  insurance  value  of  $229.80  at  the  age  of  60. 
Its  net  self-insurance  value  is  then  $422.68,  from  which  the 
law  in  case  of  lapse  deducts  $84.54,  leaving  $336.14  as  a 
single  premium  of  further  temporary  insurance.  This  will 
carry  the  risk  nearly  12  years  longer,  and  the  insurance 
value  of  this  paid-up  term  insurance  is  about  $260,  so  that 
the  company  is  paid  $84.54  for  a  loss  of  insurance,  which 
is,  in  fact,  a  gain  of  $30.20  on  that  score.  There  is  in  truth 
no  end  of  the  absurdities  which  flow  from  this  making  the 
surrender  charge  a  percentage  of  the  self-insurance  value ; 
and  when  it  is  applied  to  an  endowment  policy,  lapsing 
after  the  net  value  becomes  about  half  the  sum  insured, 
together  with  the  reduction  of  the  forborne  premiums  from 
the  claim,  it  very  nearly  nullifies  the  intended  protection. 
Thus  the  net  value  of  the  ten-year  endowment  policy,  at 


46  Politics  and  Mysteries  of 

the  end  of  the  fifth  year,  is  $440.83.  Four-fifths  of  this  is 
|352.57,  which  is  f  12  more  than  the  single  premium  for 
life  at  the  age  of  35.  Hence,  though  the  insurance  value 
has  been  increased  from  $10.18  to  $141.98,  after  a  present 
to  the  company  of  $88.16,  and  the  man  has  overpaid  by 
$100.16,  for  the  full  insurance  of  $1,000  for  life,  the  proviso 
about  forborne  premiums  comes  in,  and  if  he  should  die 
four  years  and  a  day  after  the  lapse  his  heirs  would  re- 
ceive $1,000— f  568.04=1 431-96 1 

All  that  can  be  said  of  this  law  is,  that  under  the  cir- 
cumstances, it  was  better  than  nothing.  It  will  be  seen  at 
a  glance  that  any  attempt  to  amend  it  so  as  to  make  it 
apply  equitably  to  all  descriptions  of  policies  must  be  at- 
tended with  considerable  practical  difficulties  and  require 
numerous  rather  complicated  calculations.  And  after  all, 
it  leaves  a  very  large  class  of  policy-holders,  who,  by  ja 
change  of  circumstances  have  ceased  to  need  or  wish  fur- 
ther insurance,  tied  up  to  receive  nothing  else. 

An  honest  company  cannot  suffer,  in  the  long  run,  by 
leaving  its  policy-holders  always  free  to  withdraw  in  cash 
their  self-insurance  or  savings-bank  deposit,  subject  to  a 
proper  charge  to  compensate  the  company  for  its  loss  of 
insurance  value,  and  this  charge  should  be  a  percentage  of 
its  insurance  value.  Moreover,  there  can  be  no  more  effec- 
tive safeguard  against  the  mismanagement  of  the  funds 
entrusted  to  life-insurance  companies,  than  to  establish  by 
law  the  exact  surrender  value  of  any  life-insurance  policy 
at  the  end  of  any  policy  year  in  its  history.  If  a  man  by 
self-destruction,  military  service  or  any  other  violation  of 
the  conditions  of  his  policy,  forfeits  his  right  to  insurance 
by  the  company,  that  is  no  reason  why  his  widow  should 
be  deprived  of  the  sum  wherein  he  had  insured  himself. 
The  cash  surrender  value  should  still  be  hers.  The  com- 
pany, though  it  may  have  a  right  by  the  terms  of  the  policy, 
has  no  better  moral  right  to  divide  it  among  the  remain- 


Life  Insurance.  47 

ing  or  surviving  policy-holders,  than  it  has  to  divide  the 
clothes  in  which  he  died. 

The  passage  of  this  Act  would  at  once  put  a  stop  to  the 
extravagant  expenses  which  have  grown  out  of  the  extrava- 
gant provision  for  expenses  in  the  premiums  of  endowment 
policies.  This  sort  of  policy  is  very  desirable  for  the  insured 
if  he  can  have  it  on  reasonable  terms,  and  nothing  can  be 
safer  to  the  company  than  to  give  it  to  him  on  such  terms. 
The  net  premium  for  a  whole-life  policy  of  $1,000  at  40 
is  $23.68,  to  which  if  4  per  cent,  of  the  initial  insurance 
value  is  added,  making  $33.18,  this  gross  premium  is  ample. 
So  the  net  premium  at  the  same  age  for  $1,000,  payable  at 
50  or  previous  death,  is  $85.76,  to  which  if  4  per  cent,  of 
the  insurance  value  is  added,  making  a  gross  annual  pre- 
mium of  $87.62,  the  provision  is  as  ample  as  in  the  other 
case,  if  only  the  expenses  should  be  equitably  assessed. 
But  instead  of  the  premiums  above,  the  companies  now  offer 
the  life  policy  for  about  $31.50  and  the  endowment  policy 
for  about  $105.  Unless  this  overloading  of  about  $17  for 
every  $1,000  by  this  class  of  policies  is  returned  in  divi- 
dends, the  policy-holder  is  simply  defrauded.  He  had  by 
at  least  so  much  a  year  better  have  taken  the  life  policy, 
and  put  the  difference  of  the  premiums  in  some  othel:  sav- 
ings bank. 

But  as  it  may  be  said  that  all  this  is  theory,  let  us  now 
give  a  comparison  of  the  status  at  the  end  of  four  years  of 
two  actual  policies  for  $5,000  each,  both  entered  at  the  age 
of  thirty-eight,  assuming  the  actual  interest  to  be  six  per 
cent. 

No.  1.  An  ordinary  whole-life  policy,  with  an  annual  pre- 
mium of  $146.50. 

Or.    By  amount  of  four  premiums, ....    $679  30 
Dr.    To  amount  of  insurance,  at  cost,      .    $166  99 
amount  of  dividends, .        .        .      120  29 

reserve, 276  08 

balance,  amount  of  expenses,    .      115  94 

$679  30 


48  Politics  and  Mysteries  of 

No.  2.  An  endowment  policy,  payable  at  60  or  previous 
death.  Ten  annual  premiums  of  f  382. 75  each. 

Or.    By  amount  of  four  premiums,         .  .        .  f  1,774  60 

Dr.    T.o  amount  of  Insurance,  at  cost,     .  $147  48 

amount  of  dividends,         .        .  242  31 

reserve,       .....  1,130  75 

balance,  amount  of  expenses,    .      254  06 

$1,774  60 

The  expenses,  supposing  them  the  same  each  year,  were, 
for  the  life  policy  $25.01,  and  for  the  endowment  policy 
$54.78,  per  annum.  For  these  expenses  the  premiums  more 
than  provided,  the  ordinary  life  premium  leaving  a  margin 
over  the  net,  at  four  per  cent.,  of  $36.41 ;  and  the  endow- 
ment premium  one  of  $84.23.  But  this  sufficiency  of  mar- 
gin cannot  justify  the  company  in  charging  more  where 
less  is  insured,  and  less  is  to  be  insured.  So  far  as  the  pre- 
miums are  savings  bank  deposits  it  cannot  be  pretended 
that  the  company's  service  in  conveying  them  from  the 
person  of  the  policy-holder  to  its  own  counter,  and  over  it 
into  the  till,  is  worth  more  than  two  and  a  half  per  cent., 
nor  that  the  manipulation  of  the  funds  after  they  are  de- 
posited should  cost  more  than  one-half  of  one  per  cent, 
per  annum. 

Let  us  suppose  this  to  be  settled  in  regard  to  both  of 
these  policies,  and,  moreover,  that  the  charge  on  the  life 
policy  of  $25.01  per  annum  was  sufficient,  reasonable  and 
right.  What  ought  to  have  been  the  charge  each  year  on 
the  endowment  policy  ?  The  collection  fee  of  two  and  one- 
half  per  cent.,  and  one-half  per  cent,  on  self-insurance  value 
would  have  been : — 


YEAK. 

Life  Policy. 

Endowment 
Policy. 

1,       

'       $3  99 

$10  89 

2,      

4  33 

12  27 

3,      

4  68 

13  71 

4,     

5  04 

15  22 

Life  Insurance. 


49 


This  will  leave  the  life  policy  chargable  with  an  excess 
of  |21.02  the  first  year,  $20.68  the  second,  $20.33  the  third, 
and  $19.97  the  fourth  year.  Now,  in  regard  to  the  life 
policy,  during  the  first  year,  the  present  value,  at  its  nor- 
mal cost,  of  all  the  insurance  to  be  done  upon  it  by  the 
company  in  that  and  all  its  future  years,  is  $1,138.50,  while 
the  present  value  in  that  year  of  all  the  insurance  to  be 
done  by  the  company  on  the  endowment  policy  is  $380.40. 
These  two  sums  represent  as  nearly  as  possible  the  respec- 
tive interests  of  the  two  policies,  at  that  time,  in  the  com- 
pany as  an  insurance  company,  in  distinction  from  their 
respective  interests  in  it  as  a  self-collecting  savings  bank, 
which  latter  interests  have  been  settled  for  above.  Now  if 
it  is  right  that  a  policy  having  a  stake  in  the  company  as 
an  insurance  company,  valued  at  $1,138.50,  should  pay 
$21.02  for  insurance  expenses,  the  other  policy,  which  has 
a  stake  valued  at  $380.40,  should  pay  but  Tf  J%°.|^  X  380.40 
=$7.02,  and  by  the  same  method,  it  should  pay,  in  the  suc- 
ceeding years, — 


Second  year,        ....     Tf ffifo  X  352.20  =  i 

Third  year, i^Uh  X  324.45  =   5.72. 

Fourth  year,        .  TT6#lb  X  297.65  =   5.13. 


Hence,  assuming  the  propriety  of  the  charge  on  the  life 
policy,  the  two  policies  should  have  been  charged  for  ex- 
penses thus: — 


LIFE  POLICY. 

ENDOWMENT  POLICY. 

YEAR. 

4 

On  Savings 
Bank  De- 

On Insur'ce 

Total. 

On  Savings 
Bank  De- 

On Insur'ce 

Total. 

posit. 

Value. 

posit. 

Value. 

1,         .         . 

$399+ 

$21  02= 

$25  01 

$10  89+ 

$702= 

$17  91 

2,     .    . 

4  33+ 

20  68= 

25  01 

1227+ 

635= 

18  62 

3,     .    . 

4  68+ 

20  33= 

25  01 

13  71+ 

5  71= 

19  42 

4,     .    . 

5  04+ 

19  97= 

25  01 

15  22+ 

5  11= 

20  33 

50  Politics  and  Mysteries  of 

If  we  restate  the  endowment  policy  at  the  end  of  four 
years  with  these  corrected  charges,  we  shall  find  the  divi- 
dend materially  increased,  thus: — 

Or.    By  amount  of  four  premiums,        .        .        .   $1,774  60 
Dr.    To  amount  of  insurance,  at  cost,    .    $147  48 

Reserve, 1,130  75 

amount  of  expenses,         .        .        88  16 
balance,  amount  of  dividends, .      408  21 

f  1,774  60 

The  previous  statements  being  actual  facts,  we  see  from 
this  statement  that  this  endowment  policy-holder  was  at  the 
end  of  four  years  out  of  pocket  $165.90.  So  much  of  his 
money  was  actually  gone  into  the  wildernesss  for  the  want 
of  a  proper  distinction  between  insurance  and  self-insurance. 
And  it  will  be  perceived  at  a  glance  that  the  case  is  put  only 
too  mildly,  for  on  the  average  two  and  a  half  per  cent,  is 
great  pay  for  carrying  money  to  a  savings  bank. 

It  is  not  this  particular  wrong  of  a  false  assessment  of  ex- 
penses that  it  is  proposed  to  remedy  by  legislation  except 
indirectly.  If  such  facts  exist  in  the  companies,  there  ought 
to  be  some  convenient  and  just  way  of  getting  out.  Now, 
suppose  this  endowment  policy-holder  grows  tired  of  con- 
tributing to  the  expenses  of  a  company  out  of  all  proportion 
to  any  benefits  he  is  ever  to  derive  from  it,  of  a  company  in 
fact  where  he  is  hereafter  pretty  much  to  insure  himself,  how 
can  he  get  out?  His  reserve  or  self-insurance  is  already 
$1,130.75,  and  the  company,  taking  the  unfortunate  admis- 
sion of  the  non-forfeiture  law  as  it  justification,  will  deduct 
one-fifth  and  give  him  the  balance,  $904.60.  This  means, 
that  having  been  overcharged  for  expenses  $165.90,  while  in 
the  company,  he  shall  be  overcharged,  let  us  see  how  much, 
for  getting  out. 

First.  Suppose  the  proper  charge  for  the  surrender  of  the 


Life  Insurance.  51 

life  policy  at  the  same  date,  the  end  of  the  fourth  year,  when 
its  self-insurance  is  $276.08  and  its  insurance  value  is  $1,172, 
is  $55.22,  20  per  cent,  of  the  former  and  4^0  per  cent,  of  the 
latter.  Then  the  proper  charge  for  the  surrender  of  the  en- 
dowment policy  is  4^  per  cent,  of  its  insurance  value,  which 
at  the  end  of  the  fourth  year  is  $270.90.  That  is,  it  should  be 
charged  $12.76,  making  its  surrender  value  $1,118.02  instead 
of  $904.60.  Hence  on  this  hypothesis  it  is  overcharged  in 
getting  out  of  the  company  $213.42,  which  added  to  the  over- 
charge while  in  the  company  makes  a  total  of  $379.32. 

But  second,  suppose  the  proper  charge  on  a  life  policy  or 
any  other  is  six  per  cent,  of  its  present  insurance  value,  then 
the  life  policy  should  be  charged  $70.32"  and  the  endowment 
$16.25,  so  that  on  this  hypothesis  the  overcharge  on  the 
endowment  policy-holder  to  let  him  out  of  the  company  is 
$209.93,  making  the  extent  of  his  suffering  only  $375.83,  and 
this  is  a  dead  loss  of  pretty  nearly  one  premium  out  of  fotir. 

When  we  consider  that  the  people  of  the  United  States,  out 
of  the  eighty  or  ninety  millions  of  life  insurance  premiums 
which  they  now  pay  yearly,  are  paying  about  fifty  millions  a 
year  for  endowment  policies,  or  more  than  half,  it  must  be 
seen  that  a  great  many  people, — one  quarter  of  a  million  at 
least, — have  an  interest  in  having  this  system  changed,  while 
a  much  smaller  number  have  an  interest  in  having  it  continue 
just  as  it  is. 

The  individual  constituents  of  the  mutual  life  insurance 
companies  in  this  country  count  up  to  half  a  million  probably ; 
and  each  on  the  average  represents  a  considerable  family. 
In  theory  the  management  of  these  great  companies,  now 
possessed  of  nearly  two  hundred  millions  of  cash  assets,  is  in 
the  hands  of  these  policy-holders,  acting  by  means  of  about 
ten  thousand  officers  and  agents  who  are  supported  at  an 
annual  expense  of  about  $12,000,000.  These  officers  and 
agents  may  be  policy-holders  or  they  may  not  be.  As  a  gen- 
eral rule  their  interest  as  office-holders  must  much  exceed 


52  Politics  and  Mysteries  of 

their  interest  as  policy-holders.  How  many  of  the  policy- 
holders,  not  office-holders,  ever  have  any  voice  in  their 
appointment?  For  all  practical  purposes  they  are  self-ap- 
pointed. The  government  of  these  institutions,  in  which  so 
much  of  the  future  happiness  of  the  country  is  wrapped  up, 
apart  from  some  not  very  effective  legislative  enactments,  is 
simply  autocratic,  de facto. 

For  the  multitude  of  present  policy-holders  the  legislature 
can  do  nothing,  for  they  are  bound  by  contracts  to  which 
they  voluntarily  assented.  The  obligations  they  have  taken 
upon  themselves,  however  onerous  or  unfortunate,  cannot  be 
impaired  by  statute  so  long  as  the  companies  stand  ready  to 
fulfil  all  the  obligations  they  assumed  in  the  same  instru- 
ments. But  in  behalf  of  the  future  policy-holders,  numbering 
by  tens  and  hundreds  of  thousands,  born  and  unborn,  the 
legislature  can  prescribe  that  corporations  created  by  itself 
shall  hereafter  assume  the  obligation  to  deal  on  certain  fixed 
principles  of  equity  with  every  member  who  chooses  to  retire, 
by  passing  the  following*  Bill : — 

AN  ACT  to  fix  the  Surrender  Value  of  Policies  of  Life  In- 
surance. 
Be  it  enacted,  <fcc.,  as  follows : — 

SECT.  1.  That  under  any  policy  of  insurance  on  life,  issued 
after  the  tenth  day  of  June,  in  the  year  eighteen  hundred  and 
seventy-one,  by  any  company  chartered  by  the  authority  of 
this  Commonwealth,  the  holder  thereof,  on  any  anniversary 
of  its  issue,  shall  be  entitled  to  claim  and  recover  of  the  com- 
pany, any  stipulation  or  condition  of  forfeiture  contained  in 
the  policy  or  elsewhere  to  the  contrary  notwithstanding,  a 
surrender  value,  to  be  determined  as  follows,  to  wit : — 

SECT.  2.  The  net  value  of  the  policy  at  the  said  anni- 
versary, the  premium,  if  any  is  then  due,  not  being  paid, 
shall  be  ascertained  according  to  the  combined  experience 
or  actuaries'  rate  of  mortality,  with  interest  at  four  per 
cent,  per  annum,  and  from  such  value  shall  be  deducted 


Life  Insurance.  53 

and  cancelled  any  indebtedness  to  the  company,  or  notes 
held  by  the  company  against  the  insured,  and  a  surrender 
charge  to  compensate  it  for  relinquishing  the  obligations  of 
the  policy  to  contribute  towards  the  payment  of  future 
claims  arising  under  other  policies,  to  be  ascertained  as 
follows,  to  wit: — 

SECT.  3.  Assuming  the  rates  of  mortality  and  interest 
aforesaid,  the  present  value  of  all  the  future  contributions 
of  the  policy  to  pay  death  claims,  or,  in  other  words,  of  all 
the  normal  future  yearly  costs  of  insurance  which  by  its 
terms  it  is  exposed  to  pay,  in  case  of  its  continuance,  shall 
be  calculated,  and  six  *  per  cent,  of  this  sum  shall  be  the 
legal  surrender  charge,  and  the  remainder  of  the  net  value 
of  the  policy,  ascertained  as  aforesaid,  after  deducting  this 
surrender  charge,  and  any  debts  due  the  company  as  afore- 
said, shall  be  payable  in  cash. 

SECT.  4.  ISTo  claim  for  surrender  value  under  this  act 
shall  be  valid,  unless  made  within  two  years  after  the  policy 
has  ceased  to  be  in  force. 

SECT.  5.  Chapter  one  hundred  and  eighty-six. of  acts  of 
the  year  eighteen  hundred  and  sixty-one,  shall  not  apply  to 
any  policy  issued  after  the  tenth  of  June,  eighteen  hundred 
and  seventy-one. 

After  having  faithfully  fought  for  this  bill  up  to 
its  final  defeat,  at  his  own  charges,  without  a  par- 
ticle of  aid  or  comfort  from  the  official  persons  who 
had  invited  him  to  undertake  the  warfare,  the 
writer  concluded  to  appeal  to  the  people,  the  future 
policy-holders,  themselves.  The  first  thing  to  be 
done  was  to  get  up  a  set  of  policies  of  sufficient 
variety  to  accommodate  all  honest  applicants  for  in- 

*  Amended  to  eight  per  cent,  before  passage. 


54  Politics  and  Mysteries  of 

surance,  on  such  terms  as  to  be  safe  for  the  com- 
pany, sufficiently  remunerative  to  the  agent — sup- 
posing him  a  necessity  of  the  case — and  guarded 
against  every  contingency  which  a  prudent  man  can 
foresee.  This  he  did,  taking  the  advice  of  the 
ablest  practical  experts  as  to  the  terms,  precalcu- 
lating  every  value  which  in  its  nature  admits  of 
pre-calculation,  and  so  arranging  the  premiums 
payable  on  longer  and  shorter  terms  that  one  can 
never  afford  to  put  the  difference  between  a  higher 
and  lower  premium  into  an  ordinary  savings  bank, 
but  will  take  the  shorter  endowment  in  the  life  in- 
surance company  at  the  higher  premium  in  prefer- 
ence, if  he  has  the  means.  The  working  tables  were 
published  in  1872,  with  an  explanation,  under  the 
title  "Savings  Bank  Life  Insurance."  The  only 
reason  why  the  system  was  not  popular  with  the 
companies — for  some  of  them  were  eager  enough  to 
secure  a  monopoly  of  it — was  that  the  agent  would 
get  the  least  on  the  policies  that  pay  the  largest 
premiums.  He  would  be  paid  chiefly  according  to 
the  "insurance  value"  of  the  policy,  and  not  accord- 
ing to  the  premium,  which  includes  more  or  less 
of  savings-bank  deposit,  or  self -insurance. 
.  The  life-insurance  corporations,  or  autocracies, 
the  moment  they  discovered  the  awful  muddle  they 
were  getting  into  about  short-endowment  policies, 
fell  back  on  the  old  ordinary  whole-life  policy,  as 
the  thing  which  ought  never  to  have  been  departed 


Life  Insurance.  55 

from,  seemingly  quite  unconscious  that  they  were 
thus  returning  to  the  great  original  sin  of  the  sys- 
tem— extending  the  insurance  beyond  the  insurable 
interest.  In  my  "savings  bank  system,"  I  took 
some  care  to  avoid  this,  and  the  reasons  for  it  are 
set  forth  in  the  following  extracts  from  the  Reports 
of  the  Massachusetts  Insurance  Commission,  with 
perhaps  more  force  than  I  can  now  command. 

[From  the  Ninth  Report,  1864.] 

INSURABLE  INTEREST. — In  order  to  appreciate  the  compar- 
ative merits  of  different  methods  of  life  insurance,  and  the 
value  of  the  facts  established  by  our  vital  statistics,  it  is  im- 
portant to  have  a  distinct  idea  of  what  it  is  that  is  insured. 
In  other  words,  the  first  thing  to  be  settled  is,  the  nature  -of 
the  insurable  interest  in  a  life-policy.  The  insurable  interest 
is  the  money  value  of  the  life  to  a  third  party,  and  it  can  be 
nothing  else.  The  policy  may  be  for  less  but  not  for  more. 
Says  Judge  Phillips ; — "  An  exceedingly  indulgent  construc- 
tion in  favor  of  the  sufficiency  of  an  insurable  interest  in  a 
.  life,  and  in  favor  of  the  assignableness  of  life-policies  not 
based  upon  a  substantive,  distinct,  valuable,  appreciable,  in- 
surable interest,  tends  to  convert  such  contracts  into  gaming 
policies.  Such  a  use  of  these  insurances  is  subject  to  as  great, 
at  least,  if  not  greater,  objections,  than  other  species  of  gam- 
bling. For  this  reason,  and  for  others  relative  to  the  influence 
on  morals  and  a  temptation  to  crimes,  life-policies  ought  to 
contain  provisions  requiring  notice  of  assignments  to  be 
given  to  the  insurers,  and  allowing  to  them  the  election  either 
to  assent  to  the  assignment,  or  to  redeem  the  policy  on  rea- 
sonable* terms."  (Phillips  on  Ins.,  Vol.  I.,  page  60.)  Nothing 
can  be  more  just  than  the  doctrine  here  laid  down.  A  cred- 
itor can  justifiably  insure  the  life  of  his  debtor  only  for  the 


56  Politics  and  Mysteries  of 

purpose  of  securing  his  debt,  and  to  the  amount  necessary 
for  that  purpose.  But  a  bad  debt  cannot  be  turned  into  a 
good  one  in  this  way*  If  there  is  no  probability  that  the 
debtor  will  pay  in  case  he  should  live  long  enough,  then  there 
is  to  the  creditor  no  insurable  interest  in  the  life,  and  the  pol- 
icy would  be  only  a  temptation  to  the  crime  of  destroying  it. 
Insuring  an  unproductive  life  is  like  insuring  unsalable  goods 
against  fire.  In  either  case  the  company,  in  effect,  offers  a 
reward  for  the  event  insured  against,  only  stipulating  that 
the  agency  producing  it  shall  be  so  strictly  concealed  as  to  be 
incapable  o£  legal  proof.  On  the  principle  that  any  creditor 
may  insure  the  life  of  any  debtor,  without  regard  to  the  value 
of  the  life  as  a  means  of  discharging  the  debt,  the  keeper  of 
a  grog-shop,  in  despair  of  getting  pay  for  the  liquor  which 
had  already  destroyed  the  productive  power  of  his  customer, 
might  get  the  customer's  life  insured  for  a  sufficient  sum,  and 
hasten  to  establish  a  claim  against  the  company  by  continuing 
to  furnish  liquor.  We  have  read  of  a  case  resembling  this  in 
Denmark,  and  something,  too,  much  like  it,  has  occurred 
nearer  home.  To  make  an  insurable  interest,  the  life  of  the 
insured  must  have  a  money  value  to  the  party  in  whose  favor 
the  policy  is  made.  If  a  debt  is  already  worthless,  the  life 
of  the  debtor  is  of  no  value  to  the  creditor,  and  there  is  no 
interest  in  it  to  be  insured,  any  more  than  if  the  debt  did  not 
exist.  So  if  the  life  of  a  husband  or  father  contributes  noth- 
ing, in  a  pecuniary  way,  to  the  maintenance  of  the  wife  or 
the  children,  it  is  not  justly  insurable  for  their  benefit,  no 
matter  how  great  the  loss  of  his  life  might  be  to  them  in  point 
of  love.  There  is  no  money  value  for  the  affections.  (See 
Dickens,  in  the  case  of  John  Edward  Nandy  and  Plornish, 
and  other  novel  authorities, passim.)  A  policy  of  insurance 
on  the  life  of  a  beloved  relative,  when  there  is  really  no  in- 
surable interest — that  is,  where  the  life  is  a  pecuniary  burden 
rather  than  otherwise,  if  not  felt  to  be  so — is  a  very  awkward 
and  uncomely  piece  of  gambling.  Probably  very  few  poli- 


Life  Insurance.  57 

cies  are  taken  which  have  this  character  at  first.  But  the  sub- 
ject of  a  policy  may  lose  the  insurable  interest  which  it  had  at 
first.  If  the  premium  for  the  entire  life  was  paid  at  first,  the 
case  presents  no  difficulty .  The  loss*  has  already  occurred,  and 
the  indemnity,  already  paid  for,  awaits  the  stipulated  condition 
of  its  becoming  due.  But  if  the  premium  is  payable  annually, 
we  may  ask,  in  the  light  of  the  passage  above  quoted  from 
Judge  Phillips,  why,  after  the  insurable  interest  has  ceased 
beyond  any  chance  of  recovery,  the  insured  or  anybody  else 
should  be  required  or  even  permitted  to  pay  further  premiums. 
At  any  rate,  if  the  company,  in  the  case  of  the  assignment  of 
a  policy  where  the  insurable  interest  may  have  ceased,  should 
have  the  opportunity  to  redeem  it  at  a  reasonable  rate,  should 
not  the  insure'd  also  have  the  liberty  to  stop  paying  for  further 
insurance  on  a  life  which,  though  likely  to  last  long  enough, 
has  ceased  to  have  any  money  value  or  insurable  interest  ? 
Nine-tenths  of  the  life-policies  are  made  by  their  terms  to 
cover  a  period  of  life  which,  if  reached,  is  in  all  but  exceed- 
ingly rare  cases,  wholly  destitute  of  the  insurable  element. 
You  might  almost  as  rationally  insure  for  a  given  sum  a 
wooden  house  for  one  hundred  years,  knowing  that  after 
three-quarters  of  that  time  it  would  be  utterly  uninhabitable. 
We  are  not  objecting  to  the  right  of  the  party,  having  taken  a 
policy  covering  the  whole  life,  and  paid  a  higher  premium  on 
that  account  during  all  the  really  insurable  years,  to  carry  the 
contract  through,  but  only  to  the  reasonableness  of  making 
such  a  contract  at  first. 

It  is  not  very  difficult  to  see  why  people  have  taken,  and 
are  ready  to  take,  policies  on  their  entire  lives.  Full  of  ac- 
tivity at  the  outset  of  life,  men  have  very  dim  perceptions  of 
the  nature  of  old  age.  They  expect  to  be  useful,  and  to  have 
others  dependent  upon  them  until  they  die,  be  it  early  or  late, 
and  they  dread  to  have  the  insurance  provision  just  a  little 
too  short.  The  probability  of  such  an  occurrence  every  man 
of  course  overrates  in  his  own  case.  But  as  the  second  child- 

3* .         *  Of  premium. 


58  Politics  and  Mysteries  of 

hood  approaches,  the  failing  powers  begin  to  excite  presenti- 
ments of  a  new  condition,  and  though  the  man  may  see  that 
he  has  contracted  for  something  he  will  soon  cease  to  need, 
he  feels  obliged,  by  the  heavy  penalty  under  which  he  is 
bound  to  the  company,  to  go  on  and  nurse  a  bad  investment. 
Yet  heavily  as  old  whole-life  policy-holders  always  have  to 
pay  to  be  released  from  their  obligation  to  continue  their  pre- 
miums, a  very  large  portion  of  them  discontinue  about  the 
time  when  the  insurable  interest  in  their  lives  ceases.  So 
few,  indeed,  have  continued  through  life,  that  the  combined 
experience  of  the  English  companies  is  altogether  deficient 
in  authority,  as  a  law  of  mortality,  beyond  the  age  of  sev- 
enty. Beyond  that  age,  the  scale  of  decrement  is  obliged  to 
rely  on  the  vital  statistics  of  general  population,  and  as  the 
law  of  mortality  is  demonstrably  different  for  different  classes 
of  population,  the  probability  that  the  old  age  of  insured  lives 
corresponds  with  that  of  the  general  population  is  not  a  very 
satisfactory  one.  In  insuring  beyond  seventy,  the  companies 
are  acting  comparatively  in  the  dark,  and  this  it  is  that  justi- 
fies premiums  so  greatly  redundant  during  the  earlier  years 
of  the  policy.  Provision  enough  must  be  made  against  an 
unexplored  period  of  life,  which,  taken  by  itself,  no  company, 
not  specially  devoted  to  gambling  for  its  own  sake,  would 
ever  think  of  insuring.  We  might,  if  time  and  space  per- 
mitted, derive  a  practical  illustration  of  the  insecurity  of  life 
insurance  for  the  advanced  ages  of  life,  from  what  has  hap- 
pened during  the  past  year  to  the  oldest  life  insurance  com- 
pany in  the  world,  the  Amicable  Society,  of  London.  It  has 
been  discussing  the  question  whether  to  amalgamate  or  liqui- 
date, the  new  business  having  ceased,  the  expenses  being 
.  stereotyped,  and  the  reserve  fund  not  being  sure,  in  the  ap- 
prehension of  the  ablest  actuaries,  to  meet  the  death-claims 
as  fast  as  they  may  fall  due.  It  is  needless  to  say  that  no  life 
insurance  office  deserves  to  exist  unless  it  has  a  reasonable 
probability  of  carrying  all  its  existing  contracts  through,  with- 


Life  Insurance.  59 

out  the  aid  of  new  ones.    It  is  enough  to  say,  that  in  all  that 
part  of  life  extending  from  the  age  when  insurance  begins  to 
be  desired  to  the  age  when  insurable  interest  generally 
ceases,  we  proceed  on  probabilities  amounting  nearly  to 
mathematical  certainty;  beyond  that,  we  go  by  conjecture 
and  experiment.    By  the  Act  of  1861  regulating  the  forfeit- 
ure of  life  insurance  policies,  the   objectionable  feature  of 
insuring  beyond  the  insurable  interest  is  partly  remedied,  so 
far  as  concerns  policies  since  issued  by  companies  chartered 
in  this  State.    That  is,  it  is  put  in  the  power  of  the  policy- 
holder  himself  at  any  time  to  set  a  limit  to  the  insurance 
without  forfeiting  the  value  of  his  policy.    But  a  policy  may 
still  be  maintained  at  the  pleasure  of  the  insured,  or  his 
assignee,  till  the  life  terminates.    The  expediency  of  limiting 
all  life  insurance  by  the  contract  to  a  certain  age  is  yet  to  be 
considered  in  this  progressive  country.    It  seems  to  us,  on  a 
careful  consideration  of  the  experience  of  the  companies 
which  we  have  observed  for  the  last  five  years,  as  well  as  that 
of  several  of  the  larger  American  companies  prior  to  that 
time,  that  premiums  might  be   considerably  reduced  with 
safety  on  policies  not  extending  beyond  the  age  of  seventy, 
and  that  with  a  proper  and  practicable  economy  as  to  ex- 
penses, a  company  can  safely  issue  endowment  policies,  pay- 
able at  the  age  of  seventy  or  on  previous  death,  the  annual 
premiums  charged  for  which  up  to  the  age  of  forty  or  per- 
haps fifty,  need  not  exceed  those  charged  for  whole-life  poli- 
cies.   Of  course  we  do  not  say  the  dividends  of  surplus  would 
be  so  large.    If  the  policies  do  not  extend  indefinitely,  and 
the  undetermined  hazard  of  extreme  old  age  is  not  under- 
taken, it  will  do  to  assume  a  rate  of  interest  not  so  much  be- 
low that  of  present  safe  investments.    At  any  rate,  within  the 
fairly  insurable  ages  we  are  in  a  fair  way  to  obtain  a  reliable 
scale  of  the  decrement  of  insured  life,  and  when  it  is  once 
obtained,  the  practice  can  be  made  more  closely  to  correspond 
with  it  than  whole-life  insurance  can  safely  with  a  scale 
which  is  so  largely  hypothetical  as  the  present. 


60  Politics  and  Mysteries  of 

[From  the  Tenth  Report,  1865.] 

We  remarked  six  years  ago,  in  our  Fourth  Report,  page 
27 :  "  Of  the  insurance  on  life,  a  part  consists  of  policies 
for  definite  short  terms  of  from  six  months  to  fourteen  years, 
and  some  of  such  temporary  insurances  coupled  with  endow- 
ment, or  the  payment  of  the  amount  of  the  policy  to  the 
insured  himself,  in  case  he  survives  the  term.  The  latter  are 
called  endowment  policies,  and  present  the  double  attraction 
of  providing  for  dependents  in  case  the  insured  should  be  cut 
off  during  his  active  years,  and  providing  against  dependence 
in  case  he  should  reach  old  age.  If  the  public  were  better 
aware  of  these  advantages,  this  class  of  policies  could  not 
fail  to  become  more  popular."  The  public  seems  still  una- 
ware of  the  advantages  of  temporary  insurance,  especially  of 
terms  sufficiently  extended  to  cover  the  whole  of  the  active 
or  productive  period  of  life.  It  seems  to  be  very  generally 
believed  that  if  a  term  policy  should  be  outlived  all  the  pre- 
mium paid  for  it  would  be  thrown  away.  This  seems  to  be* 
the  reasoning  of  people  who  do  not  regard  their  fire  insur- 
ance premiums  as  thrown  away  when  their  houses  have  not 
been  burned.  A  man  aged  SO  ought  to  be  able  to  get  a  pol- 
icy of  1 1,000  for  a  term  of  40  years  by  paying  at  least  $4  per 
annum  less  than  for  his  whole  life ;  that  is,  the  company  can 
well  afford  to  make  that  reduction  in  consideration  of  the 
limit.  Four  dollars  per  annum  accumulated  at  six  per  cent, 
for  forty  years  will  amount  to  $619.  But  if  he  pays  it  to  the 
life  insurance  company  in  order  to  have  the  policy  extend 
over  the  whole  life,  and  he  is  in  sound  health  at  the  end  of 
forty  years,  the  company  will  not  give  him  $619  as  the  sur- 
render value  of  his  policy,  its  value  at  four  per  cent,  being 
only  $594.38.  But  suppose  he  has  taken  the  long-term  pol- 
icy, investing  year  by  year  the  $4  difference  of  premium,  and 
dies  at  the  end  of  35  years.  Then  his  heirs  get  the  amount 
of  the  policy,  $1,000,  the  same  as  if  the  policy  had  covered 


Life  Insurance. 


61 


the  whole  life,  and  also  $445.72  the  then  amount  of  the  in- 
vestment outside.  If  he  had  paid  the  whole-life  premium, 
his  heirs  would  get  nothing  outside.  It  will  be  said  that  the 
whole-life  policy  will  get  a  larger  dividend  than  the  long 
term,  but  this  will  only  partially  compensate  the  loss,  for  a  life 
insurance  company  is  always  unprofitable  as  a  mere  savings 
bank,  on  account  of  its  necessarily  large  expenses.  But 
though  the  advantage  of  temporary  insurance  for  long  terms, 
is  so  little  recognized  either  by  the  public  or  the  officers  of 
companies,  when  considered  separately,  it  is  rapidly  growing 
in  favor  when  coupled  with  endowment,  and  of  course  with 
the  best  of  reasons,  so  far  as  the  companies  are  concerned. 
It  is  safer  for  the  company,  the  premium  being  properly  cast, 
because  its  bet  is  always  partially  hedged.  And  the  insured 
never  thinks  any  of  his  premium  thrown  away,  because,  if 
the  sum  insured  is  not  paid  to  his  heirs  he  gets  his  endow- 
ment, and  vice  versa. 

The  general  increase  of  this  class  of  policies  is  very  remark- 
able. We  give  below  the  progress  of  the  three  classes  of 
policies,  in  a  comparison  of  the  number  and  amount  of  each 
outstanding  on  our  registry  for  the  last  six  years. 


WHOLE  LIFE. 

SHORT  TEEM. 

ENDOWMENT. 

CM 

o  « 

o  j 

YEARS. 

O      'u 

Amount  In- 

1:1 

Amount  In- 

11 

Amount  In- 

a | 

&     (H 

sured. 

l§ 

sured. 

So 

3  P-l 

sured. 

fc 

* 

fc 

1858, 

38,231 

$107,659,465 

3,999 

$7,833,830 

272 

$988,900 

1859, 

44,593 

123,913,596 

3,645 

7,574,974 

369 

1,252,256 

1860, 

51,230 

142,176,279 

3,446 

7,148,114 

668 

1,974,437 

1861, 

53,348 

144,253,449 

2,945 

6,267,475 

846 

2,417,653 

1862, 

71,425 

189^94,396 

2,950 

5,810,250 

1,567 

3,958,437 

1863, 

92,083 

245,525,587 

2,741 

5,751,153 

3,119 

8,448,450 

1864, 

136,565 

357,304,512 

2,990 

6,431,974 

7,007 

18,833,703 

Relatively  to  the  whole  amount  insured,  the   short-term 
policies  are  rapidly  decreasing.    But  the  whole-life  policies 


62  Politics  and  Mysteries  of 

have  increased  at  an  average  ratio  of  twenty-two  per  cent, 
per  annum,  and  the  endowment  policies  at  an  average  ratio 
of  about  sixty-three  per  cent.  If  this  difference  in  the  rate  of 
increase  should  be  maintained  for  ten  years  there  will  be  as 
much  insured  on  endowment  policies  as  on  whole-life  poli- 
cies. And  when  we  consider  the  greater  acceleration  of  the 
endowment  business,  and  the  sound  reasons  for  it,  we  may 
expect  that  in  another  ten  years  very  few  whole-life  policies 
will  be  issued.  This  change  will  greatly  promote  the  health, 
prosperity  and  usefulness  of  the  business. 

It  seems  proper  in  this  connection  to  call  attention  to  the 
real  nature  and  use  of  life  insurance.  Any  policy  of  insur- 
ance is  in  fact  a  bet.  Its  only  justification  is,  that  it  is  betting 
made  useful.  The  condition  of  its  usefulness  is,  that  it  equal- 
izes misfortunes  or  losses.  An  insurance  on  life  does  nothing 
for  the  individual  who  dies.  If  nobody  else  loses  pecuniarily 
by  the  death,  there  is  no  more  utility  in  the  policy  than  in  any 
other  bet.  In  fact,  it  is  then  no  better  than  a  bribe  held  out 
to  somebody  to  wish  the  party  insured  dead.  Hence  a  policy 
on  a  life  can  only  be  issued  for  the  benefit  of  some  person 
who  would  lose  at  least  as  much  by  the  death  of  the  insured 
as  the  amount  of  the  policy.  The  life  of  a  debtor  may  prop- 
erly be  insured  for  the  benefit  of  the  creditor  to  the  amount 
of  the  debt.  But  the  life  of  a  creditor  cannot  be  insured  for 
the  benefit  of  the  debtor  to  any  amount.  The  life  of  the  hus- 
band may  be  insured  for  the  benefit  of  the  wife,  if  his  death 
would  involve  a  loss  of  pecuniary  support  to  her.  Otherwise 
not.  If  the  death  of  the  wife  involves  no  pecuniary  loss  to 
the  husband,  either  a  policy  on  her  life  for  his  benefit,  or  a 
joint  policy  on  the  two  lives  for  the  benefit  of  the  survivor,  is 
essentially  vicious.  Yet  policies  of  this  sort  are  quite  too 
often  issued.  Policies  are  seldom  issued  on  lives  advanced 
beyond  the  age  of  sixty-five.  On  our  registry  is  not  one  en- 
tered at  an  age  so  advanced  as  eighty,  yet  more  than  100  be- 
yond seventy-five  are  insured  by  policies  issued  earlier.  Now 


Life  Insurance.  63 

if  there  is  any  reason  why  a  policy  should  not  be  issued  on  a 
life  older  than  seventy-five,  there  is  the  same,  if  not  more, 
reason  why  no  policy  issued  at  an  earlier  age  should  cover  a 
period  beyond  seventy-five.  For  the  only  reason  to  justify 
issuing  a  policy  at  seventy-five,  would  be  the  existence  some- 
where of  an  insurable  interest  in  the  life,  and  the  fact  of  its 
existence  could  be  better  known  at  that  age  than  at  any  pre- 
vious one.  Hence  the  companies  cannot  justify  themselves 
in  refusing  to  issue  policies  at  an  advanced  age  without 
equally  condemning  themselves  for  issuing  at  earlier  ages 
policies  to  extend  beyond  that  age. 

A  simple  analysis  of  a  whole-life  policy  of  insurance  dem- 
onstrates its  impropriety.  Suppose  the  policy  taken  at  the 
age  of  thirty  for  one  thousand  dollars,  at  a  premium  paid 
down  at  once  of  $409.51,  or  of  f  22.70  paid  annually  during 
life.  Practically,  the  single  premium  is  high  and  the  annual 
premium  low,  but  they  are  exactly  equivalent,  the  one  to  the 
other,  so  far  as  the  company  is  concerned,  on  the  assumption 
that  interest  will  always  be  four  per  cent,  and  the  mortality 
that  of  the  actuaries'  rate.  It  does  not  follow  from  this  that 
they  are  the  same  to  the  insured,  the  same  assumptions  being 
true.  As  the  rate  of  mortality  is  graduated  by  years,  and 
interest  is  paid  annually,  the  contract  between  the  company 
and  the  insured  party,  whether  the  premium  be  single  or  an- 
nual, necessarily  resolves  itself  into  as  many  separate  and 
distinct  bets  as  the  assured  has  possible  years  of  life  before 
him.  The  Actuaries'  Rate  of  Mortality  assumes — for  the  pur- 
pose of  calculation — that  it  is  impossible  for  any  person  to 
live  beyond  the  age  of  100  years.  Whether  this  be  true  or 
not,  it  is  near  enough  to  the  truth  for  the  purpose.  Hence  in 
any  whole-life  policy  entered  at  the  age  of  thirty,  there  are  pre- 
cisely seventy  distinct  and  separate  bets,  and,  under  the  scale 
of  mortality  assumed,  it  cannot  be  regarded  otherwise  without 
utter  confusion.*  In  regard  to  each  and  every  possible  year 

*  That  is,  if  the  distinction  between  insurance  and  self-insurance  is 
not  recognized. 


64  Politics  and  Mysteries  of 

of  his  future  life,  the  company  bets  that  the  insured  party  will 
not  die  in  it ;  and  in  regard  to  each  and  every  such  year,  the 
insured  party  bets  that  he  will  die  in  it.  In  the  case  of  a  sin- 
gle premium,  the  party  insured  deposits  with  the  company — 
which  always  holds  the  stakes — the  stakes  on  his  seventy  bets 
all  at  once ;  for  example,  on  the  bet  that  he  will  die  in  his 
thirty-first  year  of  age,  $10.83 ;  on  the  bet  that  he  will  die  in 
his  thirty-second  year,  $10.48 ;  on  the  bet  that  he  will  die  in 
his  sixty-first  year,  f  7.78 ;  on  the  bet  that  he  will  die  in  his 
eighty-first  year,  $3.90;  on  the  bet  that  he  will  die  in  his 
ninety-first  year,  sixty  cents ;  and  on  the  bet  that  he  will  die 
in  his  100th  year,  one  mill,  nearly.  The  aggregate  of  these 
seventy  small  stakes  is  $409.51.  But  if  the  annual  premium 
of  $22.70  is  paid,  then  the  full  stake  on  the  first  of  the  seventy 
bets  is  paid  the  first  year,  to  wit :  $10.83,  the  same  as  in  the 
other  case,  and  the  remaining  $11.87  is  deposited,  not  on  the 
next  one  or  two,  but  on  all  the  remaining  sixty-nine  bets,  in 
proportion  to  the  present  value  of  the  risk  of  $1,000  on  each. 
That  is,  thirty-one  cents  is  deposited  on  the  bet  that  the  party 
will  die  in  his  thirty-second  year ;  twenty-three  cents  on  the 
bet  that  he  will  die  in  his  sixty-first  year ;  twelve  cents  that 
he  will  die  in  his  eighty-first  year ;  four  cents  that  he  will  die 
in  his  ninety-first  year,  and  about  three  per  cent,  of  one  mill 
that  he  will  die  in  his  100th  year.  If  he  survives  to  pay  the 
second  annual  premium,  he  in  fact  deposits  on  each  of  the 
sixty-nine  remaining  bets,  completing  the  stake  on  the  first, 
and  adding  something  to  each  of  the  others.  Now,  the  point 
to  which  we  wish  to  call  attention  is,  that  these  bets  are  all 
perfectly  distinct  and  independent.  In  regard  to  the  first 
year,  the  bet  is  justified  by  the  known  existence  of  an  insur- 
able  interest  in  the  life  which  is  the  subject  of  it.  The  suc- 
ceeding bets  may  be  justified  by  the  probability  of  the  con- 
tinuance of  such  insurable  interest,  and  by  the  fact  that  unless 
contracted  while  the  party  is  in  sound  health ,  they  cannot  be 
contracted  at  all.  But  the  justification  depends  upon  and  is 


Life  Insurance.  65 

proportional  to  the  probability  aforesaid,  and  entirely  fades 
out  with  it.  Now  the  probability  of  the  existence  of  an  in- 
surable  interest  at  the  age  of  sixty  may  be  sufficient  to  justify 
nailing  the  bet  by  the  deposit  of  twenty-three  cents,  or  even 
by  paying  f  7.78,  the  full  stake ;  but  what  can  justify  staking 
$3.90,  or  any  money  whatever,  on  the  bet  in  regard  to  the 
eighty-first  year  of  life,  when  there  is  no  reasonable  proba- 
bility of  insurable  interest  ?  It  is  gambling  of  the  worst  kind, 
and  all  that  can  be  said  in  its  favor  is,  that  it  sticks  like  a 
barnacle  to  a  kind  which  is  useful,  and  safe  only  because  it  is 
useful. 

We  should  shrink  with  horror  from  applying  life  insurance 
to  infants,  though  the  hopes  that  cluster  around  them  may 
easily  be  conceived  to  have  a  money  value.  Why,  then,  do 
we  insure  second  childhood,  in  which  hope  will  have  given 
place  to  history  ?  The  only  use  of  insurance  betting  is  to 
guard  against  the  pecuniary  or  financial  evil  of  the  sudden 
cessation  of  productive  energy  or  capital.  To  bet  money  in 
order  to  secure  a  money  indemnity  for  the  loss  of  a  life  that 
produces  no  money,  is  worse  than  buying  tickets  in  a  lottery, 
or  staking  money  on  the  turn  of  dice. 

We  remarked,  in  giving  the  foregoing  analysis  of  a  whole- 
life  policy,  that  it  was  the  same  thing  to  the  company  whether 
it  was  paid  by  a  single  or  an  annual  premium,  certain  as- 
sumptions being  true,  but  not  the  same  to  the  insured.  It 
would  be  the  same  to  that  practical  impossibility,  a  mathe- 
matically average  policy-holder,  or  to  one  as  rich  as  the  com- 
pany ;  but  it  is  just  because  a  man  is  nothing  of  the  sort  that 
he  seeks  to  be  insured.  It  is  because  he  wants  to  provide 
against  the  first  half  of  the  chances  of  death  more  than 
against  the  last,  that  he  takes  a  policy.  If  he  takes  a  whole- 
life  policy  at  thirty,  he  is  sure  to  lose  sixty-nine  of  his  seventy 
bets,  and  win  on  one.  As  an  average  matter,  or  taking  one 
case  with  another  in  thousands,  it  will  make  no  difference  to 
him  whether  the  stakes  are  all  paid  at  the  first,  or  only  made 


66  Politics  and  Mysteries  of 

up  as  faut  as  the  bets  are  to  determine.  The  average  man 
pays  the  same  in  either  case.  But  if  the  insured  party  wins 
the  first  bet,  by  dying  in  the  first  year,  he  loses  only  what  he 
has  deposited  on  the  others,  that  is,  $11.87  if  he  has  paid  the 
annual  premium,  and  $ 398.68  if  Tie  has  paid  the  single  pre- 
mium. This  paying  single  premiums,  it  will  be  perceived,  is 
taking  the  game  butt  end  foremost,  and  going  at  it  as  if  you 
were  yourself  a  gambling  bank  or  an  insurance  office.  Or 
taking  another  view  of  it,  it  is  purchasing  of  the  company  an 
annuity  on  your  life  to  pay  all  the  premiums  but  the  first. 
And  if  the  insurance  is  a  good  investment  for  you,  for  the 
very  same  reason  the  annuity — which  is  the  largest  part  of 
the  transaction — is  a  bad  one,  and  vice  versa. 

Whoever  has  faithfully  waded  through  these  long 
extracts,  will  not  fail  to  have  perceived  that  the 
writer's  mind,  though  seeing  some  things,  was  in  a 
dense  muddle  from  using  the  old-fashioned  specta- 
cles, which  resolve  the  whole  business  into  bets,  for 
better  or  worse.  Admitting  the  truth  of  this  view, 
and  it  is  undeniably  the  theory  on  which  the  prac- 
tice had  proceeded,  it  was  obvious  enough  on  what 
principles  the  undetermined  bets  must  be  cancelled, 
if  cancelled  equitably.  Indeed,  it  was  so  obvious, 
that  the  president  of  that  company  which  had  always 
cancelled  the  least  equitably,  and  on  that  account 
had  made  the  largest  dividends,  immediately  on 
the  publication  of  that  report  addressed  to  its  author 
an  earnest  remonstrance  against  illustrating  life  in- 
surance by  the  science  of  betting,  contending  that 
its  accumulation  ought  always  to  be  regarded  and 


Life  Insurance.  67 

Spoken  of  as  deposits  in  a  savings  bank.  There 
was  good  reason  in  this,  if  anybody  had  ever  only 
looked  at  the  subject  right  end  foremost.  Unfor- 
tunately that  letter  has  been  lost  or  it  would  be 
printed  in  this  connection.  The  writer  of  it  has 
been  taken  at  his  word,  but  he  still  sticks  to  the 
practice  founded  on  the  theory,  that  the  whole  busi- 
ness is  betting,  ignores  self -insurance,  and  insists 
on  making  "  savings  bank  "  as  applied  to  life  insur- 
ance a  misnomer  and  a  sham. 


Chapter  III. 
SURRENDER  CHARGE. 

For  the  best  life  a  minimum  premium  is  stipu- 
lated, and  this  is  never  diminished,  except  by  return 
of  demonstrated  surplus.  Can  there  be  a  maxi- 
mum charge  to  be  paid  equitably  by  the  best  life  in 
case  of  the  surrender  of  the  policy  at  any  subse- 
quent time  ?  Can  this  be  stipulated  in  the  policy 
as  well  as  the  payment  of  the  whole  face  of  the 
policy  either  at  death  or  survival  of  the  term? 
These  questions,  essentially  mathematical,  were 
brought  before  the  mathematical  advisers  of  the 
life  insurance  companies  of  this  country  three  years 
ago,  as  will  be  seen  on  a  subsequent  page.  [See 
letter  to  Mr.  White.]  Instead  of  a  convention  of 
the  executive  officers  of  these  .companies  to  settle 
them,  at  the  instance  of  the  largest  and  most  auto- 


68  Politics  and  Mysteries  of 

cratically  governed  company,  a  convention  of  State 
insurance  superintendents  was  called  by  George 
W.  Miller,  the  lately  discarded  superintendent  of 
the  Insurance  Department  of  New  York,  apparently 
for  the  very  purpose,  among  others  equally  injuri- 
ous to  policy-holders  and  the  public,  of  preventing 
a  fair  and  equitable  settlement  of  them.  This  officer 
who  was  president  as  well  as  caller  of  that  remark- 
able convention,  which  had  two  costly  sessions  at 
the  expense  of  the  policy-holders,  has  since  been 
publicly  convicted  of  being  the  overpaid  tool  of 
parties  who  prey  upon  the  policy-holder.  How  he 
served  the  life-insurance  autocracies,  while  he  was 
in  power,  the  reports  of  this  wonderful  convention 
fully  show.  It  is  their  aim  always  to  get  into  their 
hands  and  retain  as  much  of  other  people's  money 
as  they  can,  without  regard  to  justice  or  equity, 
and  they  used  this  convention,  so  finely  headed,  to 
throw  an  immense  fog-bank  over  the  eyes  of  the 
people,  in  the  form  of  scientific  research,  on  these 
very  questions.  It  was  in  the  report  of  the  first 
session  of  this  convention  that  the  lucubrations  of 
the  present  actuary  of  the  Mutual  Life,  Professor 
Bartlett,  formerly  of  West  Point, — the  promise  of 
which  by  Judge  McCurdy  had  defeated  in  the 
Massachusetts  Senate  the  bill  on  page  52 — first  saw 
the  light,  so  far  as  the  present  writer  is  informed. 

In  this  remarkable  paper,  the  distinguished  pro- 
fessor comes  to  the  point  of  "  surrender  charge  "  in 


Life  Insurance.  69 

the  following  paragraphs.  [See  First  Session,  Offi- 
cial Eeport  of  National  Insurance  Convention. 
J.  H.  and  C.  M.  Goodsell,  New  York,  1871,  page 
141.] 

"  It  would  relieve  the  question  of  much  embarrassment,  if 
medical  advisers  could  designate,  with  any  tolerable  precis- 
ion, the  number  of  years  an  applicant  for  surrender  would 
probably  live.  But  as  this  cannot  be,  the  mathematician 
must  solve  the  problem  on  the  assumption  that  the  only 
differences  of  vital  powers  are  those  arising  from  differences 
of  ages.  The  results  of  the  solution  made  upon  this  hypothe- 
sis, should,  however,  be  modified  in  amount  and  made  to 
conform  somewhat  to  the  judgment  of  medical  counsel  and 
officers  of  the  company. 

"  Supposing,  then,  that  the  members  of  a  company  are 
equally  good  in  all  respects,  except  in  the  matter  of  age,  the 
determination  of  the  surrender  value  will  result  from  the  fact 
that  the  company  and  each  of  its  members  have  a  joint  inter- 
est in  the  policy  of  the  latter.  The  present  values  of  these 
interests  being  found,  their  difference,  it  is  clear,  will  be  the 
value  sought. 

"  1.  What  is  the  company's  interest  in  any  particular  policy  ? 
Obviously,  the  present  value  of  the  sums  the  policy  would,  if 
continued  in  the  company  in  its  present  condition,  contribute 
from  year  to  year,  to  pay  death  claims  on  other  policies. 

"  2.  What  is  the  interest  of  the  assured  or  of  his  heirs  in  his 
policy  ?  The  answer  is,  the  present  value  of  the  reversion 
or  sum  the  latter  would  receive  at  death  of  the  owner,  pro- 
vided he  pay  nothing  more  than  he  has  already  paid.  This 
is,  obviously,  the  present  reserve." 

The  significance  of  the  "  insurance  value "  of  a 
policy  or  what  it  may  be  expected  to  contribute  to 


yo  Politics  and  Mysteries  of 

the  death-claims  of  the  company  over  and  above 
what  it  will  contribute  by  "self-insurance,"  or 
accumulation,  to  its  own,  having  then  been  dis- 
covered and  recognized  for  more  than  a  year,  a 
person  so  scientific  as  the  distinguished  West  Point 
Professor  could  not  in  treating  of  this  subject  leave 
it  out  of  the  account,  even  out  of  deference  to  the 
wishes  and  interests  of  the  autocratic  manager  of 
millions.  But  in  the  drollest  way,  for  a  mathe- 
matical man,  he  does  leave  out  of  the  account 
entirely,  the  interest  of  the  policy-holder  in  the 
insurdnce  to  be  done  by  the  company,  which  in  the 
case  he  supposes,  of  an  average  life,  is  precisely 
the  "insurance  value,"  or  equal  to  the  interest  of 
the  company  in  him.  In  other  words,  the  retiring 
member  with  a  vitality  no  better  or  worse  than  the 
average  in  getting  released  from  further  payment  of 
net  premiums,  releases  the  company  from  an  obli- 
gation to  insure  him  further,  of  exactly  the  same 
value.  And  in  getting  himself  released  from  pay- 
ing any  further  loading  or  provision  for  expenses 
he  releases  the  company  from  the  necessity  of 
spending  anything  further  on  his  account.  Conse- 
quently in  the  case  supposed  by  the  Professor  there 
is  really,  in  a  purely  Mutual  Company,  no  ground 
for  any  "  surrender  charge  "  or  deduction  from  the 
"self-insurance"  fund,  whatever.  It  is  only  when 
the  life  is  better  than  the  average,  that  the  com- 
pany's interest  in  the  insurance  to  be  surrendered 


Life  Insurance.  71 

exceeds  the  value  of  the  obligation  to  insure  from 
which  it  is  released.  And  what  it  has  an  equitable 
right  to  deduct  from  the  self-insurance  or  private 
accumulation  of  the  applicant  for  surrender,  is  not 
by  any  means  what  an  average  life  may  be  expected 
to  contribute  "to  death-claims  on  other  policies" 
but  what  this  life  may  be  expected  to  contribute 
over  and  above  an  average  one.  This,  though  it  is 
not  the  "insurance  value,"  and  cannot  well  be  sup- 
posed ever  to  be  equal  to  it,  will  undoubtedly  bear 
some  ratio  to  it. 

The  paper  of  Prof.  Bartlett  after  thus  deciding 
the  great  question,  proceeds  to  an  algebraic  demon- 
stration, .or  rather  expression,  of  his  views,  in 
which  what  was  true  could  not  be  new  at  that  date. 
This  having  been  rather  mercilessly  criticised  in  the 
w  Insurance  Times  "  by  a  much  younger  mathema- 
tician, Prof.  Bartlett  addressed  a  letter  to  Gen. 
Gustavus  W.  Smith  of  the  Convention,  in  which 
he  gives  his  algebra  in  a  revised  form, 'and  dis- 
tinctly recedes  from  the  absurd  position  of  making 
the  whole  insurance  value  the  surrender  charge  in 
case  of  an  ordinary  life  policy,  though  he  clings  to 
the  equal  absurdity,  though  smaller  enormity,  of 
making  it  so  in  the  case  of  a  "  paid  up  "  or  single 
premium  policy. 

This  letter,  which  may  be  supposed  to  contain 
Professor  Bartlefa's  fully  matured  view  of  the  ques- 
tion, with  the  writer's  reply  to  it  in  the  N.  Y. 


72  Politics  and  Mysteries  of 

"Insurance  Times,"  of  September,  1872,  are  given 
in  full  in  the  following  pages.  The  general  reader 
will  not  fail  to  grasp  the  pith  of  the  matter,  though 
he  should  get  no  light  from  the  algebra,  which  he 
will  be  kind  enough  to  excuse  on  account  of  the 
great  amusement  it  will  cause  to  the  technical 
reader. 

NEW  YORK,  September  13, 1871. 
General  G.  W.  SMITH,  Insurance,  Commissioner  of  Kentucky 

Chairman,  etc.,  etc. 

DEAR  SIR  : — Numerous  inquiries,  made  verbally  and  by  let- 
ter, indicate  that  the  mathematical  work  in  my  letter  to  you 
of  last  June,  on  the  subject  of  surrender  value,  is  not  under- 
stood, and  the  object  of  this  is  to  clear  up  whatever  of  doubt 
there  may  be  about  its  meaning.  When  that  letter  was  writ- 
ten, I  did  not  suppose .  its  mathematics  would  be  published. 
It  was  very  condensed ;  but,  knowing  your  habit  of  scrutin- 
izing everything  brought  under  the  exercise  of  your  judg- 
ment, I  felt  that  whatever  of  obscurity,  if  any,  there  might 
be  about  it,  could  and  would  be  dispelled  by  an  interchange 
of  ideas  between  us. 

I  will  not  repeat  the  prefatory  remarks  by  which  the 
work  was  introduced,  but  that  you  may  the  more  fully  appre- 
ciate the  spirit  in  which  it  was  undertaken,  it  may  be  proper 
to  say,  that  I  have  never  been  able  to  regard  the  institution 
of  life  assurance  as  a  mere  business  concern,  of  which  the 
main  object  is  to  make  money.  It  has  always  appeared  to 
me  rather  as  a  fraternal  charity,  created  by  the  voluntary 
union  of  persons  for  mutual  protection  against  the  calamities 
of  sudden  penury  to  helpless  widows  and  orphans — always 
dispensing  the  largest  liberality  towards  its  members,  con- 
sistent with'  equal  justice  to  all.  Of  course,  this  view  shuts 


Life  Insurance.  73 

out  all  consideration  of  what  is  known  as  the  "joint  stock 
interest.1" 

All  persons  having  any  acquaintance  with  principles  of 

permutation  and  combination  of  elements,  must  know  that 

.  the  variety  of  policies  a  company  may  issue  is  very  great. 

I  shall  confine  myself  now,  as  before,  to  the  more  popular 

and  common  cases. 

LIFE. — SINGLE  PREMIUM. 

The  premium  paid  on  this  kind  of  policy,  resolves  itself,  in 
effect,  into  two  portions,  one  of  which,  with  its  interest  accu- 
mulations, constitutes  the  policy-holders'  share  of  the  annual 
death-claims,  and  to  the  end  of  what  may  be  called  his  tabu- 
lar life ;  and  the  other  works  at  compound  interest  till  it 
amounts,  at  the  same  epoch,  to  the  sum  assured.  Those  who 
die  early  leave  to  their  heirs  more  than  they  contribute  to  the 
company,  and  those  who  die  late  leave  their  heirs  less.  A 
company,  therefore  naturally  covets  a  longevity  amongst  its 
members,  greater  than  the  average  duration  of  human  life. 

It  will  be  conceded  that  the  retiring  of  members  works 
damage  to  a  company's  vital  force.  Indeed,  it  is  easy  to  con- 
ceive that  the  process  may  be  conducted  in  a  way  and  carried 
to  an  extent  which  would  turn  the  advantages  of  selection 
against  a  company.  In  the  case  of  paid-up  life  policies,  the 
rule  that  only  good  lives  surrender,  may  be  regarded  as  al- 
most certain.  They  have  nothing  more  to  pay,  and  retire 
because  of  confidence  in  a  superior  physical  condition  and  a 
belief  that  they  can  do  better  with  their  money.  The  settle- 
ment with  these  should  be  so  made  as  to  provide  against  the 
adverse  effects  to  the  company,  likely -to  arise  from  their  own 
voluntary  act.  They  should  be  retired  under  conditions  that 
would  leave  tjje  relation  between  the  present  financial 
resources  of  the  company  and  its  future  obligations,  as 
affected  by  the  considerations  above  stated,  undisturbed. 
These  conditions  may  be  fulfilled  by  giving  to  a  retiring 


74 


Politics  and  Mysteries  of 


member,  the  money  working  to  reach  the  sum  assured,  which 
must  sooner  or  later  pass  by  death  to  his  heirs,  and  retaining 
that  pledged  for  future  death-claims. 

The  sum  of  these  constitutes,  at  any  instant,  the  assured's 
reserve.    The  difference  between  the  reserve  and  that  appro- 
priated to  death-claims,  is,  it  seems  to  me,  an  equitable  sur- 
render value.    To  compute  it,  make — 
n^=L. Single  net  premium  at  age  x,  to  assure  one  dollar  at 

death. 

j&^.Net  reserve  at  age  x,  on  a  dollar  paid-up  policy. 
vn  —.Number  of  years  a  policy  has  to  run  to  maturity. 
n  ^Difference  between  the  oldest  age  of  the  tables  and  that 

of  policy-holder  at  time  of  surrender ; 
S  —.Sum  assured ; 
.g  —.Surrender  value, 

i,  in  which 


Then    j= 


The  following  examples  will  exhibit  the  results  of  the  rule 
by  the  American  table  and  four  per  cent,  on  single  premium 
policies  for  $1,000,  at  a  few  ages : —  . 


Age,  40, 
50, 

$227.889 
318.134 

Age,  91, 
92, 

$889.826 
903.281 

60, 

437.895 

93, 

921.276 

70, 

580.167 

94| 

936.040 

80, 

729.236 

95, 

961.538 

90, 

875.803 

96, 

1,000.000 

LIFE. — ANNUAL  PREMIUMS. 

Members  who  engage  to  pay  annual  premiums  for  life,  or 
for  a  limited  term,  more  frequently  retire  because  of  a  want 
of  means  to  keep  their  premium  engagements ;  the  com- 
pany is  not  likely  to  suffer  so  much  from  adverse  selection, 


Life  Insurance. 


75 


the  question  is  narrowed  down  to  forfeiture  or  sale,  and  it 
can,  therefore,  exercise  a  greater  liberality  with  safety  to  it- 
self. I  treat  the  reserves  on  these  policies  exactly  as  though 
they  had  come  from  a  paid-up  policy,  but  not  for  the  purpose 
of  exchange.  Let  E,^,  be  the  reserve  on  an  annual  premium 
policy  for  one  dollar.  Another  policy  taken  out  by  the  same 
holder,  at  the  same  time,  but  paid  up  and  for  an  amount  that 
would  have  the  same  reserve,  E/*,  at  the  time  of  surrender, 
would  have  for  its  reversionary  value 


and  the  surrender 


(2) 


Now,  this  conversion  of  an  annual  premium-paying  policy 
into  an  auxiliary  paid-up  one,  is  not  for  the  purpose,  as  above 
stated,  of  exchange,  but  to  secure  the  equities  of  an  actual 
surrender,  to  shorten  labor  and  save  time  ai\d  expense  in  set- 
tling with  a  retiring  member. 

The  following  example  of  a  policy  for  f  1,000,  issued  at  age 
35,  and  surrendered  at  various  ages  to  the  end  of  life,  will 
illustrate  the  rule. 


AGE. 

• 

Surrender 
Value. 

AGE. 

Surrender 
Value. 

56, 

$6  38 

50, 

f  140  25 

ff 

13  14 

51, 

153  23 

W, 

20  29 

52, 

166  66 

59 

27  84 

53, 

180  54 

to, 

3581 

54, 

194  84 

a 

44  20 

55, 

209  57 

^ 

53  03 

56, 

224  71 

13, 

62  30 

57, 

240  24 

w 

72  04 

58, 

256  16 

15 

82  23 

59, 

272  46 

t6, 

92  90 

60, 

289  10 

*7, 

104  03 

61 

306  07 

$ 

115  64 

62, 

323  34 

»; 

12772 

63. 

340.89 

76 


Politics  and  Mysteries  of 


AGE. 

Surrender 
Value. 

AGE. 

Surrender 
Value. 

34, 

$358  71 

81, 

$675  79 

35; 

376  74 

82, 

694  92 

36, 

394  96 

83, 

713  66 

57 

413  34 

84, 

732  68 

53; 

431  84 

85, 

751  79 

39, 

450  42 

86, 

770  83 

ro 

469  04 

87, 

789  54 

1 

487  68 

88, 

807  64 

ra 

506  31 

89, 

825  26 

rs 

524  93 

90, 

842  13 

^> 

543  58 

91, 

859  77 

r& 

562  27 

92, 

877  77 

re 

581  03 

93, 

896  25 

^7 

599  88 

94, 

• 

903  77 

rs 

618  81 

95, 

942  69 

F9, 

637  79 

96, 

1,000  00 

50, 

656  82 

LIFE.— LIMITED  PAYMENTS. 
For  reasons  stated 

7?'    T 


TEMPORARY. — SINGLE  PAYMENT. 


Here 


or 


(5) 


TEMPORARY. — ANNUAL  PAYMENTS. 

Take  the  Reserve  R^,  as  having  arisen  from  a  paid-up  pol- 
icy of  which  the  reversionary  amount  is  determined,  as  be- 
fore, and  we  get 


(6) 


Life  Insurance.  77 


SIMPLE  ENDOWMENTS.-T-SINGLE  PREMIUMS. 
The  company  has  no  interest  in  the  longevity  of  the  hold- 
ers of  this  kind  of  policy, — on  the  contrary,  by  the  principle 
of  the  Tontine,  its  interest  is  in  their  early  death,  at  least 
death  before  maturity. 

The  reserve  on  this  kind  of  policy  being  Rx,  there  are  Z^, 
chances  for  and  against  the  company:   of  these  dx+da>+-L+ 
tf*+m_i,  favor  lapse  by  death;  and  the  surrender 
value  is  given  by 

dx+dx_L.i+  dx. 


x+m_l 


o 


;  '  m  xwv 

?T (?) 

SIMPLE  ENDOWMENTS.— ANNUAL  PREMIUM. 
The  reserve  on  this  being  ~R'X, 

ENDOWMENT  ASSURANCES.— SINGLE  PREMIUM. 
Take  sum  of  equations  (5)  and  (7) 


(9) 


»  ENDOWMENT  ASSURANCES.  —  ANNUAL  PREMIUM. 
Take  sum  of  equations  (6)  and  (8) 


('»> 


The  first  terms  in  the  brackets  of  equations  (9)  and  (10), 
become  very  small  for  short  term  policies  and  for  small 
amounts,  and  may  be  neglected  without  much  error. 


78  Politics  and  Mysteries  of 

The  following  example  of  a  ten-year  endowment  assurance, 
issued  at  age  35,  for  $1,000,  will  illustrate : — 


AGE. 

Surrender 
Value. 

AGE. 

Surrender 
Value. 

36, 

$72.486 

41, 

$516.974 

37, 

149.921 

42, 

g 

625.979 

38, 

t 

232.673 

43, 

741.553 

39, 

B 

321.130 

44, 

. 

866.167 

40, 

• 

415.736 

45, 

• 

1,000.000 

Such  is  my  solution  of  the  question  of  surrender  value  for 
the  more  popular  and  common  policies,  in  so  far  as  the  ele- 
ments that  pertain  to  this  complex  problem  have  been  sub- 
jected to  mathematical  analysis  by  myself.  I  like  it,  and  it 
suits  me  better  than  anything  of  the  kind  I  have  yet  seen. 
It  gives  surrender  values  more  equitable  and  considerably 
greater  than  companies  have  been  in  the  habit  of  paying. 

Permit  me,  in  closing  this  letter,  to  express  the  hope  that 
the  labors  of  yourself  and  your  colleagues  in  the  convention, 
may  result  in  greater  uniformity  in  the  Insurance  laws  of  the 
different  states,  and  in  the  dissemination  of  knowledge  on 
this  and  kindred  subjects,  which  shall  prevent  unwise  and 
unfriendly  legislation. 

Very  truly  yours, 

WM.  H.  C.  BARTLETT. 


[From  the  Insurance  Times,  September,  1872.] 

SURRENDER  CHARGE. 

"  The  present  value  of  the  sums  the  policy  would  contrib- 
ute from  year  to  year,  if  continued  in  the  company  in  its 
present  condition,  to  pay  death-claims  on  other  policies,  will 
pay  in  advance  for  all  the  insurance  the  policy-holder  will 
get  from  the  company  if  he  remains  in  it,  because  it  pays 
for  insurance  on  the  amount  the  company  has  at  risk  from 
year  to  year,  and  the  policy-holder's  own  money  on  deposit 


Life  Insurance.  jg 

makes  up  the  balance  of  the  policy.  With  the  light  before 
us,  we  have  utterly  failed  to  see  that  this  has  any  relation  to 
the  surrender  charge  a  company  should  make  in  case  a  pol- 
icy-holder withdraws.  When  the  actuaries  agree  amongst 
themselves  on  this  point,  the  subject  will  merit,  and  will 
probably  receive  further  consideration  at  the  hands  of  those 
most  interested, — the  policy-holders  and  the  companies." 
— Report  of  the  National  Insurance  Convention,  second  ses- 
sion, Appendix,  page  75. 

The  italics  in  the  quotation  above  are  mine,  and  intended 
to  express  some  surprise  that  such  a  sentence  should  fol- 
low that  which  precedes  it.  If  the  Superintendents  cannot 
see  that  there  is  any  relation  between  the  amount  of  the  in- 
surance business  withdrawn,  by  a  policy-holder,  in  cancel- 
ling his  contract  and  the  charge  the  company  should  make 
against  him  for  withdrawing,  there  seems  little  use  in  dis- 
cussing with  them  w^hat  that  relation  should  be.  Suppos- 
ing the  policy-holder  and  the  company  were  equally  desir- 
ous of  cancelling  the  contract,  the  policy-holder  as  much 
wishing  to  be  released  from  further  payments,  as  the  com- 
pany from  carrying  %  the  risk  further,  there  should  be  no 
charge  at  all.  But  if  the  policy-holder  alone  desires  to  be 
released,  and  the  company  considering  that  the  future  pay- 
ments will  more  than  compensate  for  the  future  risks,  wishes 
to  retain  the  policy,  it  seems  necessary  and  inevitable  that 
the  advantage  to  the  company  of  retaining  the  policy  must 
bear  some  relation  to  the  present  value  of  the  future  pay- 
ments. Of  course  it  could  not  equal  it,  for  that  would  be 
to  suppose  no  risk  of  dying.  The  charge  should,  if  possi- 
ble, be  equal  to  the  advantage  surrendered.  This  advantage 
is  a  certain  portion  of  the  normal  costs  of  carrying  the 
future  risks.  Other  things  being  equal,  it  cannot  but  be 
proportional  to  the  present  value  of  those  costs  when  we 
compare  two  policies. 

But  utterly  as  the  Superintendents  have  failed  to  see  this 
relation,  or  any  other  by  which  the  proper  charge  for  the 


8o  Politics  and  Mysteries  of 

surrender  of  a  policy  can  be  determined,  they  admit  that 
when  the  actuaries  agree  among  themselves  on  this  point, 
the  subject  will  merit  and  receive  the  attention  of  the  policy- 
holders  and  the  companies.  I  respectfully  submit  that  it 
deserves  their  attention  the  more,  if  the  actuaries  do  not 
agree.  The  more  the  doctors  differ,  the  more  it  behooves 
the  patients  to  look  out  for  themselves. 

Judging  from  the  expressed  opinions  of  the  actuaries  re- 
ferred to  in  this  Report  of  the  National  Insurance  Conven- 
tion, they  do  agree  in  seeing  some  relation  between  surrender 
charge  and  insurance  value.  They  only  differ  as  to  how  this 
relation  shall  be  applied,  or  perhaps,  as  to  whether  the  charge 
should  have  any  relation  to  anything  else. 

Now  it  is  quite  possible  that  by  a  diligent  study  of  these 
opinions,  and  the  reasons  expressed  to  sustain  them,  the 
policy-holders  and  the  companies  may  be  able  to  satisfy 
themselves  which  of  the  actuaries  is  correct.  It  is  with  a 
view  of  aiding  in  this  study  that  I  refer  to  Professor  Bartlett's 
elaborate  paper  on  this  subject,  printed  in  this  "  National  In- 
surance Report,"  pages  6-10. 

In  regard  to  a  single  premium  life  policy,  the  distinguished 
actuary  of  the  Mutual  Life  distinctly  admits  that  the  proper 
surrender  charge  has  a  relation  to  the  insurance  value  of  the 
policy  at  the  time  of  surrender,  and  to  nothing  else.  But  for 
reasons  which  he  does  not  very  distinctly  state,  and  which  are 
very  far  from  being  apparent,  he  fixes  the  charge  at  precisely 
one  hundred  per  cent,  of  the  insurance  value.  That  is  to  say, 
he  would  give  the  retiring  member  his  self-insurance,  "  the 
money  working  to  reach  the  sum  assured,"  and  retain  the 
whole  of  that  sum  which  is  working  to  pay  for  the  insurance 
he  will  receive  during  that  process.  It  certainly  cannot  be 
said  that  this  is  an  unsafe  proceeding  for  the  company,  for  it 
exacts,  in  regard  to  the  future  insurance,  full  payment  and 
carries  no  risk !  The  handle  of  this  jug  is  entirely  on  one 
side.  The  retiring  member,  for  the  sake  of  getting  back  his 


Life  Insurance.  •          81 

own  deposit,  not  a  dollar  of  which  could  ever  be  used  to  pay 
any  death-claim  besides  his  own,  pays  the  company  not 
merely  what  profit  it  might  expect  to  make  by  insuring  him, 
but  the  whole  cost  of  insuring  him,  supposing  him  to  be  a 
risk  on  which  no  profit  could  be  made.  This  is  exactly  as  if 
B  should  hire  a  horse  of  A  for  a  week,  agreeing  to  pay  $30 
for  its  use,  and  depositing  with  A  as  security  a  bond  for  $  100. 
After  a  day's  use,  he  offers  to  surrender  the  horse,  pay  $5  for 
one  day's  use,  and  the  damage  to  A  by  the  loss  of  profit  on 
the  other  five  days.  "  No,"  says  A,  adopting  the  logic  of 
Professor  Bartlett,  "  surrender  the  horse,  and  pay  me  the  other 
$25  also,  and  the  bond  is  yours."  Even  this  on  the  part  of  the 
livery-stable  man  would  be  liberal  compared  with  what  some 
life-insurance  men  have  been  known  to  do. 

Let  me  illustrate  by  one  of  Professor  Bartlett's  own  exam- 
ples. Using  the  "  American  Experience,"  at  four  per  cent., 
the  reserve  on  a  paid-up  policy  for  $1,000  is  $367.58.  Of  this, 
$139.69  is  the  insurance  value,  or  the  sum  which,  accumulat- 
ing at  four  per  cent.,  will  be  sufficient  to  pay  for  all  the  yearly 
risks  to  be  borne  by  the  company.  These  risks,  it  is  to  be 
remembered,  are  a  series  beginning  with  the  complement  of 
the  reserve  for  the  next  year  and  gradually  diminishing  to 
nothing  at  the  last.  The  residue  of  $227.89  is  accumulating 
at  the  same  rate  of  interest,  so  as  to  make,  in  addition  to  the 
sum  insured  by  the  company,  exactly  $1,000  at  the  end  of  any 
year  in  which  the  death  may  occur.  This  $227.89  is  there- 
fore a  mere  deposit,  the  whole  function  of  which  is  to  limit 
the  company's  risk  till  it  ceases  at  95.  There  is  no  possible 
profit  to  be  made  out  of  it  by  the  company,  and  therefore,  if 
the  policy-holder  retires,  Professor  Bartlett  very  properly  ad- 
mits that  he  may  withdraw  the  whole  of  it.  But  although  it 
is  clear  enough  that  if  he  withdraws  he  will  not  *enjoy 
another  particle  of  the  insurance  for  which  he  has  paid 
$139.69,  Professor  Bartlett  insists  that  he  shall  leave  the  whole 
of  that  with  the  company.  Where  is  the  equity  of  making 
4* 


82  *  Politics  and  Mysteries  of 

people  pay  as  much  for  nothing  as  for  something  ?  If  it  costs 
something  to  carry  even  the  lightest  risks,  it  must  be  worth 
something  to  be  released  from  carrying  them,  and  this  some- 
thing, whatever  it  may  fairly  be  supposed  to  be,  should  be 
deducted  from  the  $139.69  and  given  to  the  retiring  member, 
in  addition  to  his  deposit  of  f  227.89,  and  only  the  remainder 
should  be  retained  by  the  company  as  a  surrender  charge. 

The  quality  of  Prof.  Bartlett's  "  equities  of  an  actual  surren- 
der "  becomes  still  more  apparent  when  he  proposes  to  apply 
them  to  a  paid-up  term  policy.  Here  his  abbreviated  formula 
to  express  the  surrender  value,  Q,  of  a  policy  for  a  unit  to 
run  m  years  is, 


Putting  zz=36  and  m=d  we  have  by  American  Experience 
4  per  cent. 

(^C3  6  R3Y.8--  Q025706. 

^36 

Hence  the  surrender  value  for  f  1,000  is  $2.57,  while  the  re- 
serve is  $70.26,  making  the  charge  $67.69.  This  latter  sum 
would  pay  for  all  the  insurance  to  be  done  by  the  company 
in  nine  years.  If  the  $2.57,  which  was  sufficient  to  provide 
for  the  small  self-insurance  on  such  a  policy,  is  all  that  the 
retiring  member  has  taken  away  on  releasing  the  company 
from  its  obligations,  he  is  likely  to  carry  with  him  more  awe 
for  the  mysteries  of  life  insurance  than  admiration  of  its 
science  or  respect  for  its  justice. 

There  is  not  much  term  insurance  in  existence,  and  very 
little  of  that  is  paid  up.  And  there  are  still  fewer  pure  en- 
dowment policies  of  any  sort,  so  that  the  value  of  surrender 
for  thbse  two  classes  of  policies  is  comparatively  of  little 
practical  importance.  But  the  most  desirable  and  popular 
policies  are  those  which  may  be  regarded  as  combining  term 
insurance  with  pure  endowment,  though  for  business  purposes 


Life  Insurance.  83 

it  is  far  more  convenient  to  regard  them  as  combining  a  series 
of  diminishing  insurances  with  a  series  of  annual  trust  or 
savings-bank  deposits,  and  to  eliminate  altogether  the  ele- 
ment of  chance  from  the  endowment  part  of  the  business, 
making  it,  in  fact,  self-endowment  instead  of  tontine.  For 
such  policies  a  better  rule  of  surrender  than  has  thus  far  been 
much  practised  is  a  vital  necessity.  Towards  such  a  rule 
Prof.  Bartlett  would  have  taken  a  long  stride  if,  when  he 
came  to  consider  the  paid-up  pure  endowment,  he  had  not 
deserted  his  principle  of  making  the  insurance  value  the  sur- 
render charge.  If  he  had  stuck  to  that,  his  abbreviated  for- 
mula (7)  page  9,  for  the  value  of  Q  for  a  unit  of  policy,  would 
have  been 


which,  putting  x=36  and  m=§,  as  before,  would  give  SQ=. 
700.24,  if  I  do  not  mistake  the  figures.  The  reason  why  this 
surrender  value  exceeds  the  reserve,  which  is  only  $642.65,  is 
that  the  insurance  value  of  this  policy  is  necessarily  negative. 
The  application  of  the  principle  here  .would  of  course  be  as 
frightful  to  the  company,  as  in  the  other  case  it  was  to  the 
retiring  member, .  but  it  is  mathematically  as  good  in  this 
case  as  in  the  other,  the  hypopthesis  being  that  the  retiring 
life  is  better  than  the  average,  which  implies  that  the  company 
can  well  afford  to  pay  something  to  get  rid  of  it. 

But  since  in  the  case  of  pure  endowment  it  is  the  worst 
lives  that  are  most  tempted  to  retire,  and  it  is  for  the  interest 
of  the  company  to  have  them  remain,  it  is  very  proper  for  the 
actuary,  who  is  paid  by  the  company  and  not  by  the  retiring 
members,  to  propose  a  different  principle  of  surrender  in  this 
case.  By  the  contract  the  company  has  agreed,  we  will  say, 
to  pay  $1,000  to  a  party  on  his  reaching  the  age  of  45,  and  as 
a  fair  consideration  for  his  chance  of  receiving  it  he  has  paid 
a  sum  which,  at  his  present  age  of  36,  has  become  $642.65, 
the  whole  of  which  and  its  interest  he  is  to  lose  if  he  dies 


84  Politics  and  Mysteries  of 

unckr  45.  On  the  hypothesis  that  money  is  worth  4  per 
cent.,  and  the  life  is  an  average  one,  the  company  has  nothing 
to  gain  or  lose  by  the  contract,  and  of  course  the  equitable 
surrender  value  is  precisely  $642.65.  But  the  company  will 
gain  by  the  continuance  of  the  policy  if  the  life  is  worse  than 
the  average,  and  Prof.  Bartlett,  on  this  hypothesis  apparently, 
proposes,  as  a  penalty  for.  retirement,  to  deduct  $54.82  from 
$642.65,  and  return  $587.83. 

In  general  terms  he  proposes  to  find  Q,  the  surrender  value 
of  a  unit  of  paid-up  endowment,  by  the  formula  (7.)  : 

y"v      ~TT    ^jz-t-m 


For  the  particular  purpose  of  guarding  against  the  loss  of 
profitable  pure  endowment  policies  this  is  no  more  objection- 
able than  charging  the  whole  insurance  value  on  insurance 
policies,  and,  indeed,  not  quite  so  much  so.  And  there  is 
much  ingenuity  in  getting  rid  of  the  negative  sign.*  But  the 

*  Professor  Bartlett's  surrender  charge  in  this  case  is  for  a  unit  of 
policy, 


* 

which  differs  from  the  insurance  value,  or  present  value  of  the  negative 
normal  costs  of  insurance,  not  only  in  being  positive,  but  in  being  nec- 
essarily a  little  smaller  than 


which  expresses  the  insurance  value;  because,  while  he  discounts 
rmE>x  by  both  mortality  and  interest,  from  age  x+m  to  x,  into 


he  also  discounts  in  the  same  way  1  —  rmRz>  the  accumulated  yearly 
tontine  profits  (properly  enough  assumed  to  be  positive  for  the  purpose 
above  referred  to)  at  age  x+m  into 


Life  Insurance.  85 

Professor  does  not  leave  it  for  this  particular  use,  which  is 
rather  imaginary  than  real.  He  comes  down  upon  paid-up 
endowment  insurance  with  it,  and  is  thus  enabled  to  cut  a 
mathematical  antic  which  is  truly  marvellous.  He  adds  the 
surrender  value  of  the  paid-up  term  policy,  found  on  the 
hypothesis  that  the  life  is  better  than  the  average,  to  the  sur- 
render value  of  the  paid-up  endowment  for  the  same  term, 
found  on  the  contrary  hypothesis  that  it  is  worse,  and  thus 
finds  the  surrender  value  of  the  combined  paid-up  endow- 
ment insurance  policy!  Thus  combining  the  two  policies 
above  cited,  they  have  a  reserve  at  36  of  $712.91.  Adding 
the  two  surrender  values,  f  2.57-(-?  587  .83in:f  590.40,  we  have 
made  a  charge  of  f  67.69+f  54.82=f  122.51,  or  more  than  ten 
times  the  whole  insurance  value  of  the  combined  endowment 
insurance  policy.  The  adding  of  the  surrender  values  is  a 
perfectly  correct  proceeding,  and  if  the  professor  had  not  de- 
serted his  principle  in  treating  the  pure  endowment,  the  sur- 
render charge  for  the  endowment  insurance  would  have  been 
exactly  its  insurance  value,  or  flO.lt). 
As  in  this  combined  policy  the  endowment  bet  never  fully 


manifestly  a  smaller  result  than  if  he  had  discounted  the  amount  at 
age  x+m  of  each  yearly  tontine  profit,  from  age  x+m  to  the  date  of  its 
development  by  the  rate  of  interest  only,  and  from  that  date  to  age  x  by 
both  mortality  and  interest,  and  taken  the  aggregate. 

And  here  I  wish  to  express  my  regret,  as  I  have  had  occasion  to  for 
such  blunders  often  before,  that  on  recurring  to  my  own  formula  for 
the  insurance  value  of  a  paid-up  pure  endowment  in  the  preface  to  the 
revised  edition  of  my  4  per  cent.  Valuation  Tables  (page  7,  equation 
nearest  the  bottom)  ,  I  notice  an  unaccountable  error  in  the  omission  of  a 
positive  term  in  the  second  member  of  the  equation,  which,  however, 
any  algebraist  will  readily  supply  by  subtracting  the  equation  for  the 
insurance  value  of  a  paid-up  term  policy  from  that  for  the  insurance 
value  of  a  paid-up  endowment  insurance  for  the  same  term,  as  given  in 
the  remarks  that  precede  the  error. 


86  Politics  and  Mysteries  of 

hedges  the  insurance  bet,  except  in  the  last  year,  and  as  the 
same  life  cannot  be  both  better  and  worse  than  the  average  at 
the  same  time,  the  more  reasonable  assumption  for  the  com- 
pany to  make,  in  case  a  surrender  of  one  of  these  policies  is 
called  for,  is  that  the  life  is  better  than  the  average.  If  so, 
the  company  loses  by  the  surrender  of  the  term  policy  and 
gains  by  that  of  the  endowment,  in  proportion  to  the  insurance 
value  of  each.  That  is  to  say,  if  it  is  equitable  to  charge  the 
retiring  member  as  Prof.  Bartlett  proposes  to  do,  $ 67.69  for 
the  surrender  of  the  term  policy,  it  must  be  equally  so  to 
credit  him  $57.59  for  the  surrender  of  the  endowment.  He 
will  then  pay  full  price  for  all  the  future  insurance  on  the 
policy  without  getting  it,  which  is  certainly  ten  times  too  much, 
unless  it  can  be  proved  in  some  way  that  trustees  have  a 
right  to  charge  for  their  services  more  than  the  interest  of 
moriey  entrusted  to  them. 

Notwithstanding  the  palpable  want  of  equity  or  fairness  in 
charging  the  whole  insurance  value  for  surrender  in  any 
case,  Prof.  Bartlett's  plan  is,  on  the  whole,  a  considerable 
improvement  upon  what  has  been  usually  practised  of  charg- 
ing one-half  or  one-third,  if  not  the  whole  of  the  reserve,  for 
in  regard  to  annual  premium  policies  offering  to  surrender, 
in  which  case  his  rule  would  work  the  most  onerously  to  the 
retiring  member,  it  is  not  the  insurance  value  'of  the  policy  to 
be  surrendered  which  he  charges,  but  that  of  an  imaginary 
paid-up  policy  with  the  same  reserve.  By  this  substitution  of 
a  vicarious  policy  for  the  real  one,  without  much  regard  to 
the  question  whether  the  company  could  afford  to  give  such 
a  policy  or  not,  it  comes  about  that  the  surrender  charge  on 
an  ordinary  life  policy  of  annual  premiums  is  made  to  vary 
from  two  or  three  per  cent,  of  its  insurance  value,  which  is 
quite  too  small,  to  a  little  more  than  fifty  per  cent,  which  is 
much  too  large — but  not  so  bad,  I  cheerfully  admit,  as  one 
hundred  per  cent,  would  be.  It  seldom  runs  much  above 
thirty  per  cent,  of  the  reserve,  which  is  an  obvious  improve- 


Life  Insurance. 


87 


ment  upon  fifty  per  cent,  when  the  reserve  is  large.  It  is 
easy,  by  comparing  almost  any  two  examples  to  see  the  prac- 
tical arbitrariness  of  the  rule.  These  will  suffice. 

A  is  a  life  policy  for  $  1,000,  entered  at  35,  which  has  paid 
fifteen  annual  premiums.  B  another  of  the  same  amount 
on  the  same  life,  entered  at  49.  Their  respective  re- 
serves, insurance  values,  surrender  charges  and  surrender 
values,  according  to  Professor  Bartlettfs  formulas,  are  as 
follows : 


•  Reserve. 

Ins.  Value. 

Sur.  Charge. 

Sur.  Value. 

A,        ... 

B,        .        .        . 

$205  87 
22  23 

$221  80 
273  55 

$65  62 
7  26 

$140  25 
14  97 

For  A  the  charge  is  29.58  per  cent,  of  its  insurance  value ; 
for  B  it  is  but  2.65  per  cent.  Both  of  these  charges  cannot  be 
correct  unless  the  surrender  charge  is  to  be  regulated  by 
some  other  relation  than  that  to  insurance  value.  It  obvi- 
ously comes  much  nearer  being  proportionate  to  the  reserve, 
but  the  reserve  is  no  measure  of  the  company's  loss  of 
strength  in  losing  the  policy.  In  one  case  the  charge  is  suffi- 
cient to  pay  an  agent  nearly  the  two  firs|  premiums  for  get- 
ting another  policy  as  valuable  as  the  one  surrendered.  In 
the  other  case  it  is  only  sufficient  to  pay  about  half  the  usual 
commission.  Is  this  business-like  ? 

When  Prof.  Bartlett  comes  to  apply  his  double-action  rule 
of  surrender  charge  to  endowment  insurance  policies  of 
annual  premiums — a  class  of  policies  for  which  an  equitable 
value  is  particularly  needed — the  arbitrariness  of  making  the 
same  game  venison  for  one  purpose  and  veal  for  another,  is 
still  more  striking.  Here  is  policy  A,  a  ten-year  endowment 
insurance  for  $1,000,  taken  at  age  35,  which  has  paid  eight 
premiums,  and  B  a  policy  for  the  same  amount  and  term, 


88 


Politics  and  Mysteries  of 


on  the  same  life,  taken  at  42.  The  reserves,  insurance  values, 
surrender  charges  and  surrender  values,  according  to  Prof. 
Bartlett's  formulas,  as  near  as  I  can  get  the  figures  with  ex- 
temporaneous tables,  are : 


Reserve. 

Ins.  Value. 

Sur.  Charge. 

Sur.  Value. 

A,        ... 
B, 

$759  44 
79  68 

$1  31 
38  91 

#17  89 
9  77 

$741  55 
69  91 

Behold  a  rule  by  which  for  the  same  life  a  company 
charges  $8.12  more  for  the  surrender  of  a  policy  which  is 
worth  f  37.60  less !  Is  this  the  way  "  to  secure  the  equities 
of  an  actual  surrender  "  ? 

Now  when  policies  are  being  surrendered  at  the  rate  of 
some  $300,000,000  a  year,  or  about  as  fast  as  they  can  be 
acquired,  and  the  retiring  members  pervade  the  community 
with  more  ^or  less  vocal  expression  of  dissatisfied  minds — 
when  the  Mutual  Life  itself  pays  more  than  a  million  of 
dollars  a  year  as  surrender  value — does  it  not  seem  time 
that  the  executive  officers  of  the  companies  should  agree 
upon  some  rule  of  surrender  charge  which  the  policy- 
holders  can  understand  and  appreciate,  and  which  will  keep 
the  companies  from  decaying  as  fast  or  faster  than  they  grow, 
whether  the  actuaries  can  agree  to  it  or  not  ? 

As  a  sequel  and  clincher  to  this  discussion  on 
surrender  charge,  the  writer  published  in  the  "In- 
surance Times"  of  December,  1872,  the  following 
question,  which  nobody,  thus  far,  seems  to  have 
answered. 


Life  Insurance.  89 

A  CONUNDKUM  ON  LlFE  INSURANCE. 

The  question  to  be  propounded  in  this  article  interests  more 
or  "less  not  only  every  existing  policy-holder,  but  every  future, 
or  possible  one.  Those  who  are  at  all  sensitive  about  such 
interest  had  better  watch  carefully  for  the  answer.  Lest  it 
should  be  slow  in  coming,  they  are  advised  to  cut  out  the  co- 
nundrum bodilv  with  a  pair  of  scissors,  and  put  it  directly  to 
every  life-insurance  agent,  president,  actuary,  editor,  or  man 
of  figures  they  meet.  It  will  not  be  best  to  bother  the  British 
Institute  of  Actuaries  with  it,  for  the  life-insurance  companies 
which  nestle  most  securely  under  the  wings  of  that  profoundly 
scientific  body  do  not  say  much  about  paying  surrender  value, 
equitable  or  otherwise.  On  the  contrary,  if  a  policy-holder 
there  wishes  to  retire  and  cease  paying  premiums,  he  seems 
to  have  no  other  means  of  recovering  any  part  of  his  self- 
insurance  from  any  respectable  office  in  London,  than  to  sell 
his  policy  to  some  outside  speculator,  who,  without  a  particle 
of  insurable  interest  in  the  life,  pays  the  premiums  in  the  hope 
of  an  early,  and  to  him  lucky,  death,  when  he  receives  the 
whole  face  of  the  policy. 

In  this  country  our  life-insurance  companies  have  not  been 
so  scientific  as  to  open  this  charming  vista  for  predestined 
octogenarians.  Take  up  the  prospectus  or  hand-book  of 
almost  any  of  them  and  you  will  find  a  paragraph  something 
like  the  following,  which  I  copy  from  the  report  of  1862  of 
the  Mutual  Life  Insurance  Company  of  New  York,  then  as 
now  the  foremost  of  American  companies : 

"  Surrender  of  Life  Policies. 

"  Should  the  original  motive  for  effecting  an  assurance  in 
this  company  cease  before  the  termination  of  life,  the  party 
may  surrender  his  policy,  after  it  has  run  two  years,  for  an 
equitable  consideration,  which  may  be  paid  to  him  by  the 
company  on  its  surrender." 

Though  in  this  wording  "  may "  is  not  the  most  efficient 


QO  Politics  and  Mysteries  of 

auxiliary  verb  that  could  have  been  selected,  as  a  matter  of 
fact  a  vast  amount  of  surrender  value  has  been  paid  by  this 
company,  and  is  paid,  and  so  equitably  withal,  that  specu- 
lators have  very  little  chance  of  making  money  by  buying 
and  keeping  up  its  p'olicies,  even  if  American  law  would 
allow  such  transactions.  That  the  cessation  of  the  original 
motive  for  insurance  in  any  individual  case  is  a  very  impor- 
tant and  not  very  improbable  contingency,  is  obvious  enough 
from  the  fact  that  at  the  very  time  when  the  report  above 
quoted  from  was  made  there  were  outstanding  only  12,258 
policies  out  of  24,929  which  had  been  issued  by  that  com- 
pany. Considering  that  most  of  these  12,671  policies  which 
had  ceased  to  exist  were  whole-life  policies,  paying  for  the 
time-being  largely  beyond  the  risk  incurred  on  them  by  the 
company,  the  question  of  the  "  equitable  consideration  "  to  be 
received  from  the  company  on  the  cancelment  was  a  very  in- 
teresting one,  involving  in  the  aggregate  a  very  large  sum  of 
money.  It  grows  more  and  more  interesting,  since  the  ces- 
sation of  motive  to  insure  and  any  divergence  from  equity  in 
the  rule  for  settling  surrender  value  must  both  increase  with 
the  age  of  the  company.  It  is  interesting  to  every  outsider 
who,  by  any  possibility,  may  hereafter  be  tempted  to  insure. 
It  cannot  but  be  interesting,  even  when  one  is  about  entering 
an  earthly  paradise,  to  know  by  what  gate  and  on  what  terms 
he  can  get  out,  in  case  he  should  find  it  necessary  or  desira- 
ble to  do  so. 

The  gentlemen  who  have  the  executive  management  of 
life-insurance  companies  may  not  see  fit  to  notice  this  co- 
nundrum immediately.  It  is  very  proper  that  they  should 
take  abundant  time  to  consider  it,  perhaps  to  consult  with 
each  other  about  it,  and  avail  themselves  of  all  the  light 
which  science  or  the  nature  of  things  can  furnish  to  aid 
them.  If  after  they  have  done  so  they  cannot  give  an  an- 
swer consistent  with  the  present  practice  in  any  company, 
then  assuredly  a  revolution  in  their  business  is  at  hand, 


Life  Insurance.  91 

and  the  sooner  they  welcome  it  the  better  for  themselves, 
as  well  as  their  constituents. 

Conundrum. 

By  the  law  of  New  York  the  reserve  on  an  ordinary  life 
policy  for  $1,000,  entered  at  35,  at  the  end  of  its  second 
year,  is  $20.01.  (It  has  paid  two  premiums,  say  of  $26.87 
each,  thougli  the  law  does  not  regard  the  premiums  actu- 
ally paid  in -fixing  the  reserve.)  Suppose  the  "equitable 
consideration"  which  may  be  paid  to  the  insured  on  sur- 
render is  only  one  cent,  the  twenty  dollars  being  justly  and 
necessarily  retained  by  the  company  to  compensate  it  for 
the  loss  of  a  good  life.  Now,  in  the  case  of  the  surrender 
of  another  policy  for  $1,000,  also  entered  at  35,  and  which, 
having  paid  forty  premiums,  has  a  legal  reserve  of  $653.17, 
let  us  know  why  any  more  than  twenty  dollars  should  be 
deducted  from  said  reserve.  In  other  words,  if  one  cent  is 
the  just  surrender  value  of  the  former  policy,  can  anything 
less  than  $633.17  be  the  "equitable  consideration"  for  the 
surrender  of  the  latter,  and  if  so,  why  ? 

After  the  defeat  of  the  Surrender  Value  Bill  in 
the  Massachusetts  Senate,  it  became  very  obvious 
that  no  legislature  could  be  expected  ever  to  enact 
a  law  which  should  make  the  life-insurance  auto- 
cracies more  directly  responsible  to  their  theoreti- 
cal constituents,  or  which  should  forbid  the  issue  of 
policies  that  are  the  most  profitable  •  to  agents  and 
officers  who  share  commissions  with  them.  These 
autocracies  have  grown  too  rich  to  be  stinted  of 
their  most  fattening  pabulum.  They  have  too  much 
money  to  lend,  or  place  "  where  it  will  do  good," 
as  the  phrase  now  is.  The  existing  policy-holders, 


92  Politics  and  Mysteries  of 

have  no  interest  in  the  matter,  for  no  legislature 
can  modify  existing  contracts.  The  future  policy- 
holders,  born  and  unborn,  are  an  unconscious 
crowd,  incapable  of  lobbying,  and  who  do  not  even 
pretend  to  have  any  rights  which  legislatures  are 
bound  to  provide  for. 

The  only  hope  that  the  friends  of  fair  play  and 
honest  business  can  have  is  in  so  enlightening  the 
public  mind  that  life-insurance  agents,  however 
tempted  by  exorbitant  commissions,  shall  find  them- 
selves unable  to  entice  any  body  into  a  bargain  not 
fit  to  be  made. 

It  was  to  this  problem  that  the  writer  addressed 
himself  immediately  after  the  defeat  of  the  Sur- 
render Value  Bill.  He  had  done  what  he  could  to 
correct  the  blunder  committed  by  him,  as  much  as 
any  one,  in  the  Act  of  1861.  The  result  of  his 
labors  and  consultations  with  the  ablest  experts  in 
this  country,  was  published  in  a  series  of  268 
working  or  practical  tables,  in  which  all  the  values, 
important  to  be  known,  are  pre-calculated  for  every 
year  of  the  policy,  preceded  by  a  popular  explana- 
tion. As  the  tabular  work  is  necessarily  cumbrous 
and  expensive, "the  whole  of  the  explanation  will 
be  given  in  the  succeeding  pages  with  two  or  three 
specimen  tables. 

The  critical  reader  will  undoubtedly  be  disgusted, 
before  the  close  of  this  volume,  with  its  vast 
amount  of  repetition,  but  it  is  intended  for  those 


Life  Insurance.  93 

who  need  line  upon  line,  and  it  must  be  remem- 
bered that  the  nonsense  it  seeks  to  explode  has 
been  repeated  in  many  shapes  many  millions  of 
times. 

Chapter  IV. 

SAVINGS  BANK  LIFE  INSURANCE. 

The  necessity  of  maintaining  a  premium  reserve,  according 
to  some  fixed  rule,  is  now  generally  acknowledged  by  Amer- 
ican life  insurance  companies. 

It  is  not  so  generally  acknowledged  that  this  necessarily 
implies  that,  whether  the  policy-holder  is  allowed  to  regard 
himself  to  any  extent  as  a  depositor  or  not,  the  company 
must  treat  every  premium  on  a  policy  extending  for  more 
than  one  year  as  if  a  certain  part  of  it,  more  or  less,  were  a  . 
mere  savings  bank  or  trust-fund  deposit,  with  only  this  differ- 
ence from  an  ordinary  one,  that  it  cannot  be  withdrawn  till 
the  death  of  the  insured  or  the  stipulated  termination  of  the 
policy.  It  is  then  withdrawn  only  as  a  part,  or  the  whole,  of. 
the  claim.  Hence,  to  the  extent  of  that  part  of  the  claim 
which  the  company  will  pay  out  of  the  reserve  in  its  hands, 
in  any  year  when  the  death  may  occur,  the  party  may  be  said 
to  insure  himself  in  that  year.  Hence,  too,  if  the  policy  is 
made  payable  at  the  end  of  a  certain  year,  whether  the  party 
dies  in  it  or  lives  through  it,  he  insures  himself  during  that 
last  year  to  the  full  amount  of  the  claim.*  In  other  words  so 
far  as  his  net  premium  is  concerned,  he  contributes  nothing 
in  that  year  to  pay  the  claims  on  other '  policies,  nor  do  the 
other  policies  contribute  anything  to  pay  his.  This  is  the 
logical  sequence  of  a  fixed  rule  of  reserve,  and  no  cavil  at 

*  The  net  premium  is  always  calculated  on  the  supposition  that  the 
death-claim  will  be  paid  at  the  end  of  the  policy  year  in  which  the 
death  occurs.  Whatever  the  company  loses  by  paying  it  earlier,  has 
to  come  out  of  margin,  or  surplus  from  vitality  or  interest. 


94  Politics  and  Mysteries  of 

the  terms  "  savings  bank "  or  "  self-insurance  "  will  avail  to 
set  it  aside. 

It  is  quite  true  that,  so  long  as  a  policy-holder  does  not 
participate  at  all  in  surplus  and  has  no  right  to  a  surrender 
value  before  the  expiration  of  his  policy,  the  distinction  be- 
tween the  insurance  and  self-insurance  on  his  policy  is  of  no 
practical  interest  to  him.  All  he  wants  to  know  in  that  case 
is,  that  the  claim  will  be  paid  when  it  occurs.  But  the  com- 
pany, to  be  able  honestly  to  assure  him  of  this,  must  know 
that  it  has  in  reserve  a  certain  portion  of  his  past  premiums, 
and  how  much  it  will  have  to  reserve  of  future  ones..  It  must 
also  know  in  advance  the  relation  of  the  insurance  to  the 
self-insurance  on  its  various  policies,  in  order  to  know  what 
it  can  afford  to  give  to  procure  them. 

But  whenever  policy-holders  are  allowed  in  any  way  to 
participate  in  surplus,  and  still  more  when  they  are  allowed 
any  surrender  value  in  case  of  discontinuance,  then  the  inev- 
itable savings-bank  aspect  of  the  company,  as  distinct  from 
its  insurance  aspect,  begins  seriously  to  interest  them.  Many 
of  them  cannot  afford  to  have  the  distinction  ignored,  be- 
cause the  equitable  dealing  which  has  been  promised  them  in 
general  terms,  depends  upon  it.  It  has  in  fact  become  im- 
portant for  each  one  of  them  to  know  just  how  far  the  com- 
pany, under  his  policy,  acts  towards  him  as  an  insurance 
company,  and  how  far  as  a  savings  bank, — how  far  it  in- 
sures Tiim  from  year  to  year,  and  how  far  he,  by  his  payments 
beyond  the  current  cost  of  the  company's  risks,  from  year  to 
year,  insures  himself.  Under  any  policy  certainly  payable  at 
the  end  of  a  shorter  or  longer  term,  or  at  previous  death,  if 
the  premium  paid  at  the  beginning  of  each  year  is  not 
restricted  to  the  company's  risk  of  having  to  pay  the  claim  in 
that  year, — which  it  never  is, — it,  in  point  of  fact,  assumes 
only  a  decreasing  series  of  risks,  ending  in  none  at  all  the 
last  year ;  and  the  insured,  by  the  excess  of  his  payments 
over  the  costs  of  the  company's  risks,  at  interest  in  the  hands 


Life  Insurance.  95 

of  the  company,  provides  for  an  increasing  series  of  comple- 
ments, ending  with  the  full  amount  of  the  sum  insured.  Now 
if  the  insured  is  to  receive  any  surplus,  anything  at  all  be- 
sides the  indemnity  stipulated,  whether  that  surplus  is  to  be 
paid  in  cash,  in  additional  insurance  or  by  shortening  the 
term  of  the  policy,  the  equitable  share  of  it  will  depend  upon 
the  relation  of  the  insurance  to  the  self-insurance  of  the  pol- 
icy, and  the  distinct  effect  on  each  of  the  experience  of  the 
company.  On  the  insurance,  surplus  arises  only  from  the 
death-claims  and  expenses  of  the  insurance  being  less  than 
were  provided  for,  or  less  than  the  expenses  and  normal  cost 
of  carrying  the  risks.  On  the  self-insurance,  it  arises  only 
from  profits  on  the  investments  beyond  what  was  assumed  in 
the  rule  of  reserve  after  deducting  the  cost  of  managing  the 
fund.  There  may  be  surplus  on  the  self-insurance  when 
there  1%  none  on  the  insurance  and  vice  versa.  If  the  surplus 
arises  wholly  out  of  insurance  and  no  extra  interest  has  been 
realized  on  the  self-insurance  fund,  it  would  be  a  very  queer 
equity  which  would  give  a  dividend  of  any  kind  to  a  policy 
having  no  insurance  at  all  upon  it.  And  so  of  the  apposite 
case,  in  which  all  the  surplus  should  arise  from  extra  interest 
and  none  from  insurance,  to  give  equal  dividends  to  equal 
premiums,  or  equal  policies,  then  would  be  just  as  equitable 
as  to  give  equal  dividends  to  all  the  depositors  of  a  savings 
.  bank,  without  regard  to  the  amount  of  their  deposits.  By  a 
distinction  between  insurance  and  self-insurance  a  demonstra- 
ble equity  in  the  assignment  of  surplus  may  be  secured,  or  a 
fair  approximation  to  it,  and  in  no  other  conceivable  way. 

This,  in  case  the  premiums  are  so  high  as  probably  to  yield 
surplus — and  only  with  such  premiums  can  mutual  life  insur- 
ance be  conducted  with  desirable  certainty — it  is  very  impor- 
tant for  the  policy-holder  to  know.  Perhaps  there  is  no 
other  way  of  enabling  him  to  understand  the  contract  he 
makes,  and  to  be  satisfied  with  equitable  treatment  as  to  sur- 
plus and  surrender  when  'he  gets  it,  than  to  analyze  fully  the 


96  Politics  and  Mysteries  of 

business  on  his  policy  into  its  distinct  elements  of  insurance 
and  self-insurance,  and  let  him  see  how  the  two,  on  the  as- 
sumptions of  the  premium  and  reserve,  stand  related  for  each 
future  year  of  its  possible  continuance.  Apart  from  fixing  a 
surrender  value,  this  binds  the  company  no  tighter  than  it  is 
already  bound  by  fidelity  to  its  assumptions  as  to  mortality 
and  interest,  if  not  by  statute  law  as  to  reserve.  Can  the 
company  bind  itself  to  a  fixed  rule  of  surrender  value,  so  as 
to  make  what  has  been  called  self-insurance  substantially  a 
savings-bank  deposit  ? 

The  policy-holder  who  takes  a  policy  binding  the  company 
to  insure  him,  sick  or  well,  for  a  long  number  of  years,  must 
be  well  aware  that  its  ability  to  do  so  will  depend  upon  its 
continuing  to  have  a  very  large  number  of  members,  and  that 
every  healthy  member  who  leaves  it,  diminishes  its  strength 
and  stability,  more  or  less,  according  to  what  he  n^ght  be 
expected  to  pay  towards  .death-claims,  if  he  did  not  leave. 
Hence  it  is  very  absurd  to  say  that  a  company  can  afford  to 
release  a  healthy  member  from  his  contract  whenever  he 
pleases  to  retire,  and  allow  him  to  withdraw  his  self-insurance 
fund,  without  making  any  compensation  to  the  company  for 
its  loss  in  the  non-fulfilment  of  his  Contract.  This  loss  has 
no  relation  whatever  to  the  self-insurance  or  reserve,  for  that 
could  be  of  no  use  to  the  other  members  if  he  remained,  being 
wholly  devoted  to  meet  the  party's  own  claim ;  but  it  has- 
direct  relation  to  the  risks  contracted  to  be  borne  by  the  com- 
pany and  the  successive  payments  to  be  made  on  account  of 
them.  The  present  value  of  those  payments,  or  normal  costs 
of  insurance,  discounted  on  the  same  assumptions  of  mortality 
and  interest  as  are  used  in  computing  the  reserve,  or  what 
may  be  called  the  insurance  value  of  the  policy  as  distinct 
from  the  self-insurance  value  or  reserve,  must  be  the  basis  of 
estimating  the  company's  loss  by  a  withdrawal.  The  self- 
insurance  value  is  only  a  security  in  the  hands  of  the  com- 
pany, more  or  less  ample,  for  the  payment  of  this  damage. 


Life  Insurance.  97 

When  this  damage  or  surrender  charge  is  paid,  the  security 
is  released;  and  the  whole  savings-bank  deposit  is  with- 
drawn. 

Let  it  be  understood  that  the  insurance  value  is  not  the 
charge,  but  the  basis  of  the  charge.  For  when  the  insurance 
value  is  lost,  there  is  a  cancelment  of  the  company's  liability 
gained,  and  if  the  retiring  life  were  no  better  than  the  aver- 
age, the  gain  would  fully  offset  the  loss.  We  have  only  to 
provide  a  charge  on  the  assumption  that  it  is  better.  If  it  is 
better,  the  gain  Will  not  fully  offset  the  loss,  and  the  differ- 
ence will  be  proportioned  to  the  insurance  value.  Hence  the 
surrender  charge  must  be  some  percentage  of  the  insurance 
value,  either  variable  or  invariable. 

This  is  by  no  means  an  innovation  in  principle,  but  only  a 
new  mode  of  applying,  or  rather  looking  at,  a  principle  long 
ago  accepted.  Though  the  usual  policy — a  form  borrowed 
from  England — expressly  excludes  the  right  of  the  policy- 
holder  to  withdraw  any  part  of  the  premiums  previously  paid, 
in  case  of  his  forfeiting  the  right  to  further  insurance  by 
non-payment  of  premium  or  otherwise,  in  practice,  in  this 
country,  the  reserve  has  always  been  returned,  either  in  cash 
when  applied  for  while  the  policy  was  in  force,  or  in  pre- 
mium notes,  the  company  having  deducted  more  or  less  of 
the  cash  part  of  it — if  there  was  any — as  a  compensation  for 
its  loss.  The  only  variation  of  the  practice  from  the  savings- 
bank  theory  has  been  that  the  companies  have  not  estimated 
their  loss  with  any  regard  to  the  'insurance  value  withdrawn, 
but  have  erroneously  regarded  it  as  having  some  relation  or 
other  to  the  reserve  or  self-insurance  value.  The  grotesque 
absurdity  of  this,  only  waited  for  the  short-term  endowment 
insurance  business,  which  has  so  enormously  increased  of  late, 
to  bring  it  fully  to  light. 

That  the  principle  of  recognizing  the  right  of  the  policy- 
holder  in  the  reserve,  as  a  savings-bank  deposit,  which  it  is 
the  object  of  the  present  work  to  apply  more  correctly  in 
5 


o> 

praetK*,.  has  been  held  by  authority  worthy  of  the  highest 
respect*  may  be  siatffifriently  proved  by  a  quotation  from  a 
pamphlet  issued  by  the  New  England  Mutual  Life  Insurance 
Comply  In  1^  ironi  the  pen  of  its  first  President  Hon. 
WIEbrd  Pbillip^,  UL  B^  the  author  of  the  well-known  treatise 
on  Insurance  L&w.  He  opens  by  saying,  "The  object  of  this 
iBSftibrtka^ 

ID  that  of  savings  banks,"  and  before  he  closes  he  has  the 
JbDowing  passage*  which  clearly  recognizes  that,  to  a  certain 
not  distinctly  defined  extent,  its  method'also  embraces  a 


*  It  sometimes  happens,  that  the  motive  for  making  insur- 
t  ceases  before  the  policy  has  expired.  Instances  will  also 
^toaXtf  occur,  of  persons  being  disappointed  of  the 
of  paying  the  premium,  and  so  being  liable  to  forfeit 
their  poueie&.  In  any  such  case,  the  company  will- consent 
to  a  surrender  of  the  policy  upon  fair  terms,  if  an  application 
is  made  lor  that  purpose  before  the  policy  is  forfeited.  Where 
the  policy  is  made  for  a  longer  period  than  it  has  actually 
run,  the  amount  of  premium  paid  upon  it  will  have  been 
greater  than  if  it  had  been  made  only  for  such  time. 

tt  Suppose,  for  example*  that  a  person  of  the  age  of  twenty- 
fire  years  has  insured  himself  for  his  whole  life  in  the  sum  of 
one  thousand  dollars,  and  at  the  end  of  seven  years,  wishes, 
for  whateyer-reason,  to  surrender  his  policy.  If  he  had  taken 
the  policy  originally  for  that  period,  he  would  have  paid,  in 
the  -whole,  in  annual  premiums  and  deposits,  f  7  7.70,  but 
taking1  the  policy  lor  his  whole  life,  he  has  paid  in  and  depe>- 
itedf  1^60,  making  a  difference  of  $60.30.  In  this  case  the 
company  has  paid  out  the  $77.70 ;  lor,  though  the  person  in- 
sured sunires  the  period  of  seven  years,  yet  if  one  -  hundred 
hare  been  insured  lor  that  time,  one  of  them  has  died  and  the 
premium  must  tie  such  as  to  enable  the  company  to  pay  the 
loss.  This  is  the  principle  upon  which  the  premium  for  a  pol- 
ky  lor  that  period  is  calculated.  The  party  proposing  to  sur- 
render has  had  the  good  fortune  to  live,  and  the  surviving 
£unirj;of  the  one  who  has  died  has  bad  the  good  fortune  to 
be  provided  for.  But  the  company  cannot  afford  to  square 
the  account  by  merely  striking  this  balance,  and  paying  back 
the  whole  $60.90  to  a  person  who,  being  in  good  health, 


Life  Insurance.        •  99 

wishes  to  surrender  his  policy,  since  another,  who  was  insured 
for  his  whole  life,  and  whose  health  has  been  impaired  during 
the  .seven  years,  might  choose  not  to  surrender  his  policy; 
and  the  company  should  avail  itself  of  the  policy  on  which 
the  risk  has  turned  out  favorably,  to  make  up  for  th:/ 
which  the  risk  has  proved  unfavorable.  Some  reservation 
must,  therefore,  on  this  account,  be  made  by  the  company  out 
of  the  amount,  whatever  it  may  be,  which,  in  the  above  ex- 
ample, is  represented  by  f  60.90 ;  since,  otherwise,  the  com- 
pany would  be  prejudiced  by  agreeing  to  the  surrender.  As 
to  the  amount  of  this  reservation,  it  is  evident  that  no  precise 
rule  can  be  laid  down,  but  it  is  obvious  that,  after  a  policy  for 
the  whole  life  has  begun  to  acquire  a  present  value,  that  value 
goes  on  increasing  and  regularly  approximating  every  year 
towards  the  amount  insured,  and  making  such  approximation 
more  and  more  rapidly,  as  the  party  insured  advances  in  age, 
and  his  bodily  infirmities  increase,  and  the  increase  'of  mor- 
tality becomes  developed ;  so  that,  if  it  becomes  necessary 
for  him  to  avail  himself  of  such  value,  that  necessity  is  most 
likely  to  come  upon  him  at  a  period  of  life  when  it  has  made 
a  near  approximation  to  the  amount  insured,  and  when,  if  he 
had  not  reserved  to  himself  this  resource,  he  most  probably 
would  have  had  no  resource  whatever.  The  above  sugges- 
tions are  made  for  the  purpose  of  giving  to  the  holder  of  a 
policy  for  life,  the  means  of  making  a  proximate  estimate  of 
its  value  from  time  to  time.'"  * 

The  fact  that  the  method  of  the  company  embraces  the  two 
functions  of  insurance  and  savings  bank  is  here  sufficiently 
admitted.  The  only  defects  are  the  assumed  impossibility  of 
distinguishing  between  them  by  any  "  precise  rule "'  as  to  the 
amount  of  "  reservation "  or  surrender  charge,  and  making 
the  right  to  receive  surrender  value — or  withdraw  deposits — 
depend  on  applying  for  it  while  the  insurance  is  in  force. 
Plainly,  if  there  can  be  any  title  apart  from  the  terms  of  the 
policy  to  receive  such  value,  it  will  be  as  good  the  moment 
after,  or  any  reasonable  time  after,  the  forfeiture  of  the  right 

*  See,  also,  the  Fifth  Annual  Report  (1848)  of  the  Directors,  where 
the  interest  of  members  in  the  "reserved  funds  "  is  expressly  admitted. 


ico  .Politics  and  Mysteries  of 

to  be  further  insured,  as  it  was  before,  and  cannot  depend  for 
its  existence  on  the  company's  being  notified  to  pay  it. 

Let  us  inquire  whether  there  is  any  good  reason  why  there 
cannot  be  a  "  precise  rule "  as  to  the  maximum  surrender 
charge.  If  there  is,  it  must  hold  equally  good  against  fixing 
any  precise  premiums  or  terms  of  entrance.  It  is  no  more 
reasonable  to  attempt  to  grade  and  value  individually  the 
good  lives  that  seek  to  withdraw,  and  have  a  sliding  scale  of 
surrender  charges  without  a  maximum  limit,  than  to  do  the 
same  thing  in  regard  to  those  who  seek  to  enter,  and  have  a 
sliding  scale  of  premiums  without  a  minimum  limit.  If  we 
have  admitted  all  unexceptionable  lives  at  the  same  premium 
for  the  age,  it  must  be  admitted  that  the  best  of  them  will 
probably  pay  more  dearly  for  the  same  benefit  than  the  worst. 
This,  if  it  is  an  evil,  or  a  departure  from  equity,  is  necessary 
in  a  system  which  is  founded  on  human  ignorance  of  future 
events,  and  could  not  honestly  exist  if  this  ignorance  had  not 
considerable  density.  But  if,  on  this  system  we  have  made  the 
healthiest  of  these  insured  persons  pay  for  several  years  the 
same  as  the  least  healthy,  that  is,  more  than  the  cost  of  his 
insurance,  and  then,  when  he  applies  for  surrender,  we  grow 
suddenly  wise,  and  charge  him  more  than  we  would  an  aver- 
age good  life,  we  cannot  logically  refuse  to  credit  him,  against 
this  excess,  with  the  excess  of  his  past  payments.  Here  th» 
case  becomes  as  broad  as  it  is  long. 

In  all  good  faith  and  charity,  is  the  claim  that  the  company 
must  grade  the  surrender  charge  according  to  its  notions  of 
the  degree  of  vitality  in  the  retiring  life,  any  better  than  the 
pretence  that  applicants  for  insurance,  in  a  normal  state  of 
health  and  with  no  apparent  predisposition  to  disease,  can  be 
graded  by  a  study  of  their  ancestors, — multiplying  back  into 
the  past,  as  an  innumerable  dim  cloud  of  dusty  witnesses, 
from  which,  according  to  theory,  ought  to  converge  upon  the 
living  individual  all  possible  diseases,  including  longevity  ? 
This  argument  proves  decidedly  too  much  in  both  cases. 


Life  Insurance.  101 

As  to  compensating  the  company  on  the  whole,  and  suffi- 
ciently, for  the  loss  of  good  lives,  it  is  quite  plain  that  it  can 
be  done  as  well  by  a  precise  charge  MS  a  variable  one,  if  we 
only  make  the  precise  charge  high  enough.  Because,  it  is 
impossible  for  the  company  to  lose  more  (this,  of  course,  ap- 
plies to  a  mutual  company,  in  which  surplus  is  supposed  to 
be  divided  as  fast  as  it  arises),  than  (ho  whole  of  the  insur- 
ance value.  And  even  a  charge  of  one  hundred  per  cent,  of 
the  insurance  value,  would  be  a  great  improvement,  in  point 
of  equity,  upon  the  present  ill-founded  and  indefinite  rule. 

But,  fix  the  charge  as  we  will,  and  admit  that  it  is  suflieient 
to  compensate  the  company  for  its  loss,  it  is  pertinaciously 
contended  that  guaranteeing  any  surrender  value  at  all  is 
offering  a  premium  for  lapse,  and  that  it  is  wiser  to  oiler 
nothing,  but  when  a  case  arises  treat  it  "  on  its  own  merits." 
Very  well.  How  do  we  get  at  the  merits?  How  do  \ve 
know  that  a  life  that  was  admitted  as  good  is  now  better? 
And  if  we  do  know  it,  would  we,  on  the  strength  of  this 
knowledge,  reduce  the  premium?  If  not,  and  certainly  we 
should  not,  how  can  we  say  to  the  man,  Though  your  vital- 
ity is  not  good  enough  to  justify  us  in  reducing  your  pre- 
mium if  you  stay  in,  it  is  so  good  and  so  much  better  than 
the  average  that  you  must  pay  an  extra  charge  for  going 
out? 

The  plain  truth  is,  that  the  officers  of  the  company  have 
not  knowledge  enough  to  make,  :i  distinction  between  the 
vitalities  of  what  may  be  called  unexceptionable  lives. 
Neither,  on  the  other  hand,  have  the  best  lives  any  such 
knowledge  of  their  own  vitality  as  to  get  the  advantage 
of  the  company  in  selecting  themselves  out.  From  the  ne- 
cessities of  human  ignorance  and  other  circumstances,  the 
game  is  a  pretty  fair  one  on  both  sides.  The  fuel,  is,  that 
men  stick  to  their  policies  as  long  as  they  have  the  ?// 
and  the  means  to  continue,  and  when  those  fail,  or  either 
of  them,  they  will  discontinue  without  much  regard  to  their 


los  Politics  and  Mysteries  of 

state  of  health,  whether  the  surrender  value  returned  is 
equitable  or  not.  But  if  it  is  not  equitable,  the  credit  and 
popularity  of  the  company  is  likely  to  suffer  as  much,  in  the 
long  run,  as  the  purse  of  the  retiring  policy-holder. 

If  there  is  any  force  in  these  considerations,  the  fairest 
measure  of  the  loss  of  the  company  by  the  non-fulfilment 
of  a  policy-contract,  is,  what  it  will  cost  to  procure  another 
of  equal  insurance  value,  on  a  life  equally  good.  If  the 
charge  is  made  unquestionably  more  than  this,  the  stability 
of  the  company  cannot  possibly  be  impaired  by  guarantee- 
ing a  surrender  value,  unless  we  suppose  the  public  de- 
mand for  insurance  is  to  cease,  which  is  the  same  thing  as 
supposing  that  civilized  society  is  to  come  to  an  end,  or 
some  miraculous  change  is  to  happen  to  it. 

What  does  it  cost  to  get  insurance  value  ?  What  is,  or 
what  ought  to  be  its  market  price?  Much  of  it  has,  in 
point  of  fact,  cost  too  much.  Most  of  it,  however,  has  ac- 
tually been  obtained  for  three  or  four  per  cent,  of  itself. 
The  scheme  here  proposed  assumes  that  the  company  will 
be  fully  indemnified,  on  the  average,  for  its  loss  of  insur- 
ance value  on  the  best  lives  by  a  charge  of  eight  per  cent, 
on  the  same. 

Let  us  see  how  this  rule  would  apply  to  the  case  put  by 
Judge  Phillips.  The  four  per  cent,  reserve  on  a  policy  for 
$1,000  entered  at  twenty-five,  at  the  end  of  the  seventh 
year  is  $58.53.  Its  insurance  value  at  that  time  is  f  192.41, 
of  which  eight  per  cent,  is  $15.39.  A  new  policy  entered 
at  twenty-five  for  $1,432,  payable  at  sixty-five  or  previous 
death,  will  have  the  same  insurance  value,  $192.41,  and  the 
annual  premium  of  this  in  the  New  England  Life  Insurance 
Company,  would  be  $31.51.  $15.39  is  nearly  fifty  per  cent, 
of  this,  or  about  twice  as  much  as  the  company  has  to  pay 
for  procuring  a  policy  as  valuable  to  it  as  the  one  it  lost. 
The  new  policy  is  indeed  a  little  more  valuable  to  it,  from 
being  limited  to  sixty-five.  The  policy  which  it  lost  ex- 


Life  Insurance.  103 

tending  over  the  whole  life,  a  part  of  its  insurance  value 
consists  of  insurance  to  be  done  beyond  the  insurable  in- 
terest, and  is  of  a  somewhat  inferior  quality.  It  is  on  this 
account  that  a  company  can  undoubtedly  afford  to  give  a 
little  more,  in  proportion  to  its  insurance  value,  for  an  en- 
dowment insurance  of  moderate  term,  than  for  a  whole-life 
insurance, — though  by  no  means  several  times  as  much,  as 
is  commonly  done. 

Let  us  suppose  an  army — an  army  of  occupation  for  ex- 
ample— in  which  sound  health  is  the  main  desideratum,  and 
which  is  recruitable  at  so  much  a  head.  Is  it  weakened, 
by  the  "  precise  rule,"  that  a  discharge  can  be  had  by  pay- 
ing twice  the  cost  of  procuring  a  substitute  satisfactory  to 
the  surgeon?  Would. the  sanitary  condition  of  the  army 
be  lowered  by  such  a  rule  ?  It  is  easy  to  see  how  the  army 
might  be  weakened,  by  mustering  out  soldiers  for  money, 
if  no  recruits  could  be  obtained,  and  so  a  life-insurance 
company  might  be  weakened,  as  such,  by  members  retiring, 
if  none  came  in.  If  all  public  demand  for  life  insurance 
should  cease,  the  more  the  old  members  should  retire,  the 
sooner  would  the  business  come  to  an  end,  but  not  a  dis- 
astrous one. 

To  recur  again  to  the  army :  it  is  plain  enough  that  en- 
listment is  unpopular  in  proportion  to  the  difficulty  of  get- 
ting out,  should  one  change  his  mind  after  some  experience 
of  camp-life.  Any  reasonable  alleviation  of  that  difficulty 
will  reduce  the  cost  of  getting  recruits.  So  in  life  insurance : 
nothing  has  more  enhanced  the  difficulty  of  adding  new 
members,  than  the  exorbitant  sacrifices  that  often  have  to 
be  made  by  old  members  who  have  paid  their  full  premi- 
ums in  cash,  when  they  have  occasion  to  retire. 

If  a  man  is  able  to  take  a  policy,  and  will  really  be  ben- 
efited by  it,  a  stipulated  surrender  value,  which  is  reason- 
able and  business-like,  will  remove  from  his  mind  every 
obstructive  doubt,  and  there  will  be  no  need  of  expending 


io4  Politics  and  Mysteries  of 

upon  him  costly  visions  of  dividends,  which  it  would  be 
death  to  the  company  to  realize.  To  persuade  any  pru- 
dent man  to  take  a  policy  on  the  present  terms,  with  no 
rule  of  surrender  that  can  be  understood  or  stated  in  ad- 
vance in  figures,  it  is  necessary  to  work  him  up  to  such  a 
pitch  of  enthusiasm  or  infatuation  that  he  shall  entirely 
overlook  the  fact  that  his  circumstances  may  change,  and 
he  may  cease  to  need  insurance  before  the  term  of  his  pro- 
posed policy  expires.  This  is  a  tedious  and  costly  process. 
In  the  aggregate,  it  now  costs  in  the  United  States  many 
millions  of  dollars  a  year. 

In  fire  insurance  a  great  part  of  the  business  flows  into  the 
companies  spontaneously.  The  savings  banks  proper  pay 
nothing  to  obtain  theirs,  and  it  is  immense  and  quite  perma- 
nent. Life  insurance  companies,  to  which  a  great  multipli- 
cation of  risks  is  specially  important,  will  undoubtedly 
always  have  to  pay  something  for  obtaining  business,  or  at 
least  till  State  legislatures  reduce  the  rate  at  which  they 
create  new  companies.  But  by  adopting  the  savings-bank 
plan,  the  expense  of  getting  it  can  unquestionably  be  greatly 
reduced,  so  that  even  the  soliciting  agent  will  not  be  the  loser 
by  the  low  commissions. 

It  is  believed  that  the  following  tables  furnish  as  copious  a 
choice  of  policies  as  is  desirable,  and  a  restriction  of  the 
business  of  a  company  to  these  will  greatly  simplify  its  ac- 
counts and  calculations.  From  fifteen  to  thirty  years  of  age 
persons  will  have  the  option  of  eight  different  policies ;  from 
thirty  to  thirty-five,  of  seven ;  from  thirty-five  to  forty,  of  six, 
&c.,  with  different  proportions  of  insurance  and  self-insurance. 
The  lowest  premium  will  turn  out  the  best  in  case  of  an  early 
demise,  although  it  pays  most  to  expenses  while  it  continues. 
But  the  highest  premium  will  prove  best,  if  the  party  lives 
through  the  term,  on  the  principle  that  the  more  he  insures 
himself  the  less  he  has  to  pay  towards  the  expenses  of  the 
company.  And  it  will  always  be  better,  if  one  can,  to  take  a 


Life  Insurance.  105 

shorter  policy  at  a  higher  premium,  than  a  longer  one  at  a 
lower  premium,  if  one  is  to  live  and  surrender  at  the  end  of 
a  given  number  of  years,  because  in  the  latter  case,  one  must 
have  paid  expenses  in  proportion  to  the  larger  amount  of  in- 
surance contracted  for.  For  example :  a  person  at  twenty- 
five,  has  the  option  of  taking  eight  different  policies,  of  which, 
the  terms  vary  from  fifteen  to  fifty  years,  and  the  premiums 
from  $22.45  to  $56.07  per  $1,000. 

If  he  takes  that  of  the  longest  term,  paying  $22.45  per  an- 
num, and  at  the  end  of  ten  years  surrenders,  he  will  get  back 
$83.58  in  cash,  the  rest  of  the  $224.50  and  interest,  supposing 
there  have  been  no  dividends,  having  gone  for  the  death- 
claims  of  others,  the  working  expenses  and  the  surrender 
charge.  And  suppose  that  he  had  annually  deposited  in  a 
savings  bank,  yielding  five  per  cent,  interest,  the  difference 
($33.62)  between  the  lowest  and  highest  premium,  he  might 
then  have  in  addition  to  the  $83.58,  the  amount  of  $444.02, 
making  $527.60,  as  the  residual  of  his  expenditure  of  $560.70. 
If  he  takes  the  shortest  policy,  which  will  cost  him  just  that, 
the  residual  at  the  end  of  ten  years  will  be  $585.31,  a  gain  in 
this  event,  over  the  other  arrangement,  of  $57.71.  It  is  very 
true  that  there  would  be  about  thirty-seven  per  cent,  more  of 
insurance  done  by  the  company  in  the  ten  years  under  the 
long  policy,  which  would  have  made  it  a  better  arrangement 
to  die  on.  The  point  is,  that  the  short  one  is  the  better  to 
live  through  on,  or  to  surrender  on,  and  in  fact  better  than 
the  long  one  with  the  savings  bank  added,  which  can  by  no 
means  be  said  of  the  present  short-term  endowment  policies, 
with  the  usual  rates  of  premium  and  conditions  of  surrender. 

Under  the  present  system,  unless  a  person  is  quite  sure  that 
he  will  be  able  to  continue  his  policy,  so  as  to  share  the 
profits  of  the  forfeiture  of  other  policies,*  and  will  need  to 

*  Betting  on  persistence  when  the  persistent  members  are  sure  to 
win,  is  undoubtedly  profitable,  whatever  may  be  said  of  its  morality. 
It  is  by  no  means  a  necessary  or  graceful  feature  of  life  insurance,  and 
5* 


io6  Politics  and  Mysteries  of 

continue  it,  it  is  always  best  for  him  to  take  the  whole-life  or 
longest  endowment  policy,  because  he  can  always  invest  the 
difference  between  the  premium  of  that  and  a  shorter  term 
more  profitably  than  in  the  life-insurance  company, — in  a 
savings  bank  for  example.  But,  on  the  contrary,  under  the 
system  of  savings-bank  life  insurance  here  proposed,  no  per- 
son who  needs  insurance,  and  has  anything  to  pay  for  it,  can 
afford  to  make  any  deposit  whatever  in  a  savings  bank. 

As  life  insurance  is  now  conducted,  beyond  any  question, 
one-fourth  of  the  premium  paid  into  the  life  insurance  com- 
panies had  better  be  paid  into  savings  banks,  as  it  could  be 
without  at  all  reducing  the  insurance  effected.  To  illustrate : 
in  1870  life  insurance  to  the  amount  of  about  two  thousand 

it  is  more  congenial  to  the  avowed  object  of  the  institution  to  avoid  all 
needless  departure  from  the  legal  maxim,  suum  cuique.  But  as  this 
betting  is  now  managed,  the  persistent  members,  as  a  body,  do  not  win 
in  all  cases  of  forfeiture,  and  supposing  they  do  win  on  the  whole,  an 
individual  among  them  is  by  no  means  sure  of  receiving  his  fair  share 
of  the  winnings,  if  any  one  knows  what  that  is. 

For  example :  when  a  company  holds  premium  notes  on  a  policy  be- 
yond its  equitable  cash  surrender  value,  it  will  lose  by  forfeiture,  unless 
it  collects  the  notes,  a  process  that  is  never  thought  of,  much  less 
effected.  Again,  when  it  gives  a  paid-up  policy,  presumed  to  be  a  fair 
reversion  of  the  net  value  or  reserve,  it  never  gains*  much,  and  some- 
times loses  a  little,  because  it  takes  no  account  of  its  loss  of  insurance 
value  in  the  operation. 

Supposing  that  I  is  the  insurance  value  per  dollar  of  the  existing  pol- 
icy at  the  date  of  the  change,  and  z  is  the  proper  percentage  of  it  for  a 
surrender  charge,  and  I'  is  the  insurance  value  per  dollar  of  a  paid-up 
policy  at  the  party's  present  age ;  then  for  an  existing  policy  of  S  dollars, 
which  has  run  t  years,  the  company  can  afford  to  give,  on  a  good  life, . 

only  §    x+*      **•  ,  and  would  give  too  much  if  it  gave  g    x+t  .    When 

II*H  — zS  Hx+t 

on  a  policy  having  m  possible  payments  it  gives  a  paid-up  policy  for 

t 

~  S,  it  often  gives  more  than  the  former  value,  even  when  it  gives  less 

than  the  latter. 


Life  Insurance.  107 

millions  was  in  force  in  the  United  States,  and  the  premium 
paid  was  about  ninety  millions.  Sixty-eight  millions  would 
have  procured  just  as  much  insurance,  on  policies  of  longer 
terms  or  slower  payment,  and  the  difference  of  twenty-two 
millions,  in  the  absence  of  savings-bank  life  insurance,  would 
much  more  profitably  have  been  deposited  in  ordinary  sav- 
ings banks.  On  the  other  hand,  as  life  insurance  ought  to  be 
conducted,  probably  one-quarter  or  one-half  the  deposits  in 
the  savings  banks  could  be  transferred  to  the  life-insurance 
companies,  with  great  benefit  to  the  families  of  the  de- 
positors. 

How  TO  ADJUST  THE  PREMIUMS. 

The  light  of  antiquity  tells  us  that  we  shall  go  safest  in  the 
middle  of  things.  There  is  no  going  in  the  middle,  in  life 
insurance,  without  providing  in  the  premiums  for  death- 
claims  occurring  somewhat  Taster  than  we  expect  them,  and 
for  interest  being  less  and  expenses  more  than  they  need  be. 
Putting  the  working  expenses  out  of  the  account,  we  shall 
have  a  middle  path  in  providing  for  death-claims,  if  we  as- 
sume, in  calculating  the  net  premiums,  only  four  per  cent, 
interest  and  the  actuaries'  mortality,  which  has  proved  con- 
siderably higher  than  the  average  experience  of  American 
companies.  This  is  the  well-established  basis  for  computing 
net  premiums,  and  there  seems  to  be  no  occasion  to  unsettle 
it  in  providing  for  savings-bank  life  insurance. 

But  the  margin  to  be  added  to  the  net  premium,  as  a  pro- 
vision for  expenses  and  extraordinary  contingencies,  should 
obviously  be  modified  to  adapt  it  to  the  principles  above 
stated. 

The  expenditures  of  a  life-insurance  company  may  be  clas- 
sified under  the  following  heads : — 

1.  The  death-claims. 

2.  Surrender  values,  including  endowments. 

3.  Cost  of  managing  the  reserve  or  self-insurance  fund. 


io8  Politics  and  Mysteries  of 

4.  Cost  of  collecting  the  premiums. 

5.  All  other  working  expenses,  including  the  cost  of  pro- 
curing business. 

The  first  three  heads  are  amply  provided  for  by  the  net 
premiums  and  their  interest.  The  last  two  only  are  to  be 
provided  for  by  added  margin.  The  cost  of  collecting  the 
premiums  may  as  fairly  be  proportioned  to  their  amount  in 
this  business  as  any  other,  whether  they  are  devoted  to  insur- 
ance or  self-insurance. 

All  the  other  working  expenses  should  be  assessed  in  pro- 
portion to  the  insurance  value  of  the  policy  for  the  year  in 
which  they  occur,  because  that  value  represents  the  compara- 
tive interest  which  each  member  has  in  the  company,  as  an 
insurance  company,  in  that  year.  To  provide  for  this  and 
nothing  more,  would  be  to  add  a  margin  varying  with  the 
insurance  value  from  year  to  year,  which  would  have  the 
great  inconvenience  of  making  the  gross  premiums  variable. 
To  avoid  this,  as  well  as  to  avoid  extending  the  insurance 
beyond  the  insurable  interest,  no  policy  is  extended  beyond 
the  age  of  SEVENTY-FIVE.  Policies  limited  to  that  age  do 
not  increase  in  insurance  value  much,  if  any,  so  that  a  con- 
stant margin  added,  proportionate  to  the  initial  insurance 
value,  will  gradually  become  more  and  more  ample  for  its 
purpose  as  the  policy  increases  in  age,  and  of  course  will  be 
more  and  more  returned  in  dividend,  if  not  needed  for  ad- 
verse contingencies.  This  redundancy  of  margin  in  the 
advanced  years  of  a  policy  is  far  from  being  undesirable  as 
an  additional  resource  against  adversity  in  a  remote  future. 
In  the  following  tables,  four  per  cent,  of  the  initial  insurance 
value  is  first  added  to  the  net  premium  as  a  provision  for  ex- 
penses under  the  fifth  head,  and  then  one  thirty-ninth  of  itself 
is  added  to  the  sum,  to  make  the  gross  premium,  on  the  sup- 
position that  two  and  one-half  per  cent,  of  it  will  be  allowed 
as  the  cost  of  collection.*  If  it  should  be  objected  that  so 

*  Adopting  the  notation  used  in  the  preface  to  the  revised  edition  of 


Life  Insurance.  109 

slender  a  margin  does  not  give  motive-power  enough  to  work 
the  machine,  and  the  percentages  added  should  be  increased, 
let  it  be  considered  that  they  make  the  premiums  of  the  long- 
est ter,ms  higher  than  they  are  now,  and  no  one  pretends 
that  a  company  wholly  consisting  of  such  policies  could  not 
stand,  or  that  the  premiums  have  not  sufficient  motive-power. 
The  premiums  of  the  shorter  terms  are  lower,  but  they  have 
more  margin  in  proportion  to  the  insurance  to  be  done  on 
them  than  on  those  of  the  longer  terms,  for  the  collection-fee 
is  added  to  the  whole.  If  they  are  too  low,  it  is  because  a 
savings  bank  cannot  be  run  for  two  and  one-half  per  cent,  on 
each  deposit  at  the  time  of  its  reception,  and  one  per  cent. 
per  annum  of  the  whole  amount  on  deposit. 

The  expenses  of  the  fourth  and  fifth  heads  must,  of  course, 
be  confined  within  that  margin  at  first,  and  must  bear  a  de- 
creasing ratio  to  it  as  the  policies  grow  older.  It  is  Obvious 
enough  that,  on  this  plan,  if  the  expenses  should  be  exces- 
sive, assessing  them  in  proportion  to  insurance  value,  would 
show  negative  contributions  to  surplus  from  policies  of  large 
insurance  value,  and  small  self-insurance,  while,  at  the  same 
time,  there  might  be  a  preponderance  of  positive  contribu- 
'  tions  from  policies  of  small  insurance  value  and  large  self- 
insurance.  This  would  require  a  new  assessment  of  these 
negatives  or  deficiencies,  on  the  policies  of  positive  contribu- 
tion, and  this  would  produce  another  smaller  crop  of  nega- 
tives, to  be  at  last  reduced  to  zero  by  repeating  the  process, 
before  the  divisible  surplus  could  be  equitably  distributed.  In 
fact,  it  might  at  last  amount  substantially  to  assessing  the 

my  Valuation  Tables,  the  general  form  of  the  gross  premium,  P*,  for  a 
Savings-Bank  Insurance  Policy  will  be 

p_ 
f  - 


n-xT  1  _  y 

the  first  term  of  the  second  member  being  the  net  premium  ;  the  second, 
the  provision  for  that  part  of  the  expenses  which  is  to  be  assessed  in 
proportion  to  insurance  value  ;  and  the  third,  the  provision  for  a  collec- 
tion-fee to  be  allowed  as  a  constant  percentage  y  of  the  gross  premium. 


no  Politics  and  Mysteries  of 

insurance  expenses,  according  to  the  margins,  a  manifest 
hardship  to  the  holders  of  the  short-term  policies  approach- 
ing their  termination,  whose  margin,  small  as  it  is,  after  de- 
ducting the  uniform  collection  fee  of  two  and  one-hglf  per 
cent.,  is  still  very  large  in  proportion  to  the  insurance  that 
remains  to  be  done  on  them.  The  proper*course  is  to  restrict 
the  expenses  to  such  a  degree  that  negative  contributions 
shall  not  appear.  The  actuary  will  have  no  difficulty,  with 
the  analysis  of  the  following  tables  applied  to  each  policy  at 
the  beginning  of  any  year,  to  inform  the  company  within 
what  limit  the  aggregate  expenses  of  the  year  must  fall,  to 
avoid  negative  contributions.*  It  has  been  found,  in  almost 
all  financial  institutions,  a  wise  thing  to  restrict  expenses  by 
definite  pre-appropriation.  There  is  more  need  of  this  in 
life  insurance,  because  the  death-claims,  which  cannot  be 
restricted,  must  be  expected  to  fluctuate  considerably,  both  in 
number  and  amount,  and  there  is  always  a  possibility  that 
they  may  slightly  exceed  the  normal  cost  of  insurance  so  as 
to  require  some  part  of  the  margin. 

THE  ADVANTAGES  OF  THE  SYSTEM. 

1.  The  policies  will  be  more  persistent,  because  every  one 
will  know  at  the  start  what  he  is  to  expect,  and  will  know 
that  the  longer  he  stays  in  the  less  it  will  cost  him  to  get  out  ; 
whereas,  under  the  old  system,  he  soon  learns  that  the  longer 
he  stays  in  the  more  it  will  cost  him  to  get  out. 

2.  When  any  one  leaves  the  company  he  will  go  out  satis- 
fied, having  been  dealt  with  on  prescribed  and  pre-understood 

*  Thus,  supposing  that  S  stands  for  the  savings-bank  deposits  on 
outstanding  policies,  P  the  aggregate  gross  premiums  on  the  same,  pay- 
able during  the  year,  and  I  their  aggregate  insurance  value,  the  ex- 
penses, exclusive  of  commissions  on  new  policies,  must  be  limited 

o 

l>  to  avoid  negative  contributions  on  some  of 


the  policies,  in  case  the  death-claims  of  the  year  should  equal  the 
normal  ones. 


Life  Insurance.  in 

terms.  The  company  will  thus  avoid  the  back-water  from 
retiring  members,  which  is  now  troublesome,  if  not  over- 
whelming. 

3.  Equitable  dividends,  should  there  be  any  surplus  to  di- 
vide, can  be  made  intelligible  to  any  member.  He  is  sup- 
posed to  have  a  table,  like  one  in  this  work,  analyzing  all  his 
annual  payments.  The  company,  by  means  of  similar  tables, 
so  keeps  its  books  that  it  can  tell,  by  a  mere  footing  of  them, 
what  is  its  required  reserve,  what  the  insurance  value  of  all 
its  policies,  and  what  the  normal  cost  of  carrying  all  its  risks. 
It  can  tell,  at  the  end  of  its  fiscal  year,  what  has  been  its 
average  rate  of  interest,  what  its  death-claims  are  in  excess 
of  the  self-insurance  on  them,  and  what  its  working  expenses, 
over  one  per  cent,  of  the  self-insurance  fund  and  two  and  one- 
half  per  cent,  of  the.  premium  receipts,  have  been.  Let  us 
suppose  the  actual  interest  has  been  six  per  cent.,  the  actual 
cost  of  insurance  four-fifths  of  the  normal  cost,  and  the  ex- 
penses, less  the  cost  of  collection,  three  per  cent,  of  the  insur- 
ance value.  If  this  experience  of  the  company's  fiscal  year 
is  to  be  applied  to  all  policies  whose  policy-years  ended  in  it, 
to  determine  the  contribution  to  surplus  which  is  to  be  re- 
turned as  dividend  at  the  settlement  of  the  next,  or  the  suc- 
ceeding premium  (which  is  near  enough  to  equity,  as  a  prac- 
tical rule*),  each  policy-holder  may  easily  calculate  his  own 
dividend,  or  at  any  rate  easily  satisfy  himself  whether  what 
the  company  assigns  him  is  correct,  knowing  the  several 
factors  above  stated. 

For  example :  suppose  his  policy  is  for  $1,000,  payable  at 
death  or  fifty,  entered  at  twenty-five  and  has  closed  its  ninth 
year,  within  this  fiscal  year  of  the  company.  Referring  to 

*  Under  this'  rule,  a  retiring  policy-holder  necessarily  forfeits  any 
surplus  that  may  have  arisen  on  his  policy  during  its  last  year.  With 
this  the  surrender  charge  and  the  rule  that  surrender  value  shall  be 
paid  only  at  the  end  of  a  policy-year,  the  life-insurance  savings  bank 
will  be  safer  against  panic,  or  a  run  upon  it,  than  any  other. 


H2  Politics  and  Mysteries  of 

the  table  (No.  4),  we  find  his  reserve  at  the  end  of  his 
eighth  year  f  207.49,  to  which  was  added  at  the  beginning  of 
the  ninth,  f  22.15,  making  the  self-insurance  fund  at  the  begin- 
ning of  the  ninth  year  $229.64.  Four  per  cent,  of  the  inter- 
est was  required  to  make  this  $238.83  at  the  end  of  the  year, 
and  one  per  cent,  to  pay  for  managing  the  fund,  so  there  is 
$2.30  of  surplus  from  the  self-insurance.  The  normal  cost  of 
insuring  him  that  year  was  f  6.53,  of  which  one-fifth  or  $1.31 
was  saved,  which  is  so  much  more  of  surplus  from  vitality. 
The  insurance  value  at  the  beginning  of  the  year  was  $54.30. 
Three  per  cent,  of  this  would  be  $1.63  for  expenses,  to  which 
if  two  and  one-half  per  cent,  of  the  premium  be  added  for 
collection,  we  have  $2.45  to  be  deducted  from  the  margin, 
$4.23,  which  leaves  a  surplus  from  that  source  of  $1.78.  Thus 
the  surplus  which  belongs  to  him  is, — 

From  self-insurance,      .        .        .        .  $2  30 
From  insurance,     .        .  .        .     1  31 

From  margin, 1  78 

$5  39 

In  the  same  way,  if  the  policy  had  ended  its  first  year 
within  the  fiscal  year,  its  surplus  would  have  been, — 

From  self-insurance,      .        .        .        .  $0  21 

From  insurance, 1  46 

From  margin,         .        .  .        .        86 

$2  53 

And  for  its  twentieth  year  it  would  have  been, — 

From  self-insurance,      .        .        .        .  $6  70 

From  insurance, 68 

From  margin, 3  09 

$10  47 

Executive  officers  who  have  the  task  of  explaining  "  con- 
tribution "  dividends  to  thousands  of  members,  will  not  be  a 
great  many  years  in  finding  out  the  advantage  of  this  arrange- 
ment. 

Other  advantages  of  great  public  import  might  be  named, 


Life  Insurance.  113 

such  as  diminishing  to  the  degree  of  ordinary  saving  banks 
the  necessity,  difficulty  and  expense  of  governmental  super- 
vision, and  removing  the  mystery  which  now  deprives  the 
business  of  the  popularity  it  deserves ;  but  enough,  it  is  be- 
lieved, has  been  said  to  satisfy  all  conscientious  life-insurance 
men,  who  understand  human  nature  and  seek  its  welfare,  that 
it  is  worthy  of  a  fair  trial. 

THE  VALUE  OF  LIFE  INSURANCE. 

It  must  not  be  inferred  from  what  precedes,  that  life  insur- 
ance, as  it  exists  in  this  country,  is  not  worthy  of  the  immense 
confidence  it  has  received.  The  civilization  of  this  continent 
has  no  institution  of  which  it  has  a  better  right  to  be  proud. 
It  is  the  standing  together,  shoulder  to  shoulder,  of  hosts  of 
manly  men,  to  defend  each  others'  homes  from  that  enemy 
who  shoots  on  the  sly  and  in  the  dark.  It  is  the  realization 
of  fraternity  without  the  destruction  of  independence  and  in- 
dividuality. It  is  a  charity  without  cant,  which  enriches  the 
giver  and  does  not  humiliate  the  receiver.  Thanks  to  the  care 
which  has  been  taken  to  maintain  reserve  at  a  high  standard, 
looking  at  the  business  as  a  whole,  there  is  no  hollowness. 
What  it  has  been  doing,  it  can  continue  to  do.  The  world 
has  been  delighted  with  itself  at  the  degree  and  promptitude 
of  the  alleviation  which  has  met  the  Chicago  calamity.  Amer- 
ican life  insurance  silently,  every  year,  meets  suffering  of 
almost  equal  amount  and  deeper  intensity,  with  nearly  all  the 
alleviation  money  can  give.  The  organization,  in  advance, 
of  this  relief,  and  the  certainty  of  its  application  in  case  of 
need,  give  it  a  current  value  to  all  parties  concerned,  which 
far  transcends  the  ninety  or  one  hundred  millions  a  year 
which  it  costs.  Here  are  nearly  a  million  of  men  whose 
aggregate  material  wealth,  all  told,  does  not  perhaps  exceed 
five  hundred  millions,  who  by  this  institution  have  possession 
of  two  thousand  millions  in  addition,  immediately  available 
for  the  only  purpose  for  which  they  really  need  or  could  enjoy 


ii4  Politics  and  Mysteries  of 

it.  This  is  better  than  a  rich  uncle  to  a  young  man  who  has 
not  a  rich  father ;  and  if  he  has  both,  and  also  the  noble  am- 
bition to  paddle  his  own  canoe,  it  is  better  than  a  share  in  a 
gold  mine. 

The  institution  may  have  defects  to  be  supplied,  or  excres- 
cences to  be  pruned  away,  but  any  charlatanry  which  would 
depreciate  its  value,  or  undermine  public  faith  in  it,  would  be 
equally  deplorable  and  unpardonable.  The  aim  and  rea- 
soning of  the  foregoing  pages  will  be  entirely  misapprehend- 
ed if  they  are  supposed  to  favor  the  conclusion  that  the  hold- 
ers of  existing  policies  had  better  relinquish  them.  The 
number  of  those  who  could  wisely  take  such  a  course  has 
never  been  one-half  or  one-quarter  as  great  as  of  those  who 
have  taken  it,  nor  is  it  likely  that  good  reasons  for  withdrawal 
will  increase. 

Life  insurance  is  so  good,  is  capable  of  a  so  much  wider 
application,  and  is  so  thoroughly  in  unison  with  the  spirit  of 
our  republican  society,  that  it  cannot  fail,  by  and  by,  to  be 
understood  by  everybody  and  enjoyed  by  everybody  who 
needs  it,  as  universally  as  the  various  arrangements  by  which 
steam  and  lightning-  are  utilized.  What  is  wanted  is,  that 
the  school-house  and  the  press — the  universal  educators — 
shall  take  up  the  matter,  not  in  the  interest  of  the  companies 
or  their  agents,  but  in  that  of  the  public  and  its  coming  gen- 
erations. The  companies  l^ave  nothing  to  fear,  but  every- 
thing to  hope  from  the  most  thorough  discussion  of  their 
plans  and  the  exposure  of  all  the  details  of  their  management. 
In  borrowing  the  science  of  their  business  from  England,  they 
wisely  did  not  borrow  that  instinct  of  corporation-secrecy 
which  prevails  in  it  there  with  very  unfortunate  results. 
They  have  expended  liberally  to  enlighten  the  public,  and 
have  welcomed  governmental  investigation  to  an  extent  that 
is  almost  ludicrously  superfluous,  and  threatens  to  be  more 
so.  It  is  not  at  all  creditable  to  the  press  that  it  should  so 
little  aid  them  in  this  matter, — rarely  speaking  at  all  -of  its 


Life  Insurance.  115 

own  motion,  and  then  too  often  in  a  style  to  make  it  profitable 
to  the.  public  as  well  as  the  companies  to  buy  its  silence. 

Notwithstanding  all  this,  the  business  has  had  a  develop- 
ment in  this  country  which  a  mere  reader  of  newspapers  finds 
it  difficult  to  believe.  And  this  development  has  been,  in  the 
main,  sound  and  healthy,  because  the  companies  have  been 
so  much  more  ready  to  meet  intelligent  criticism  than  the 
press  to  apply  it.  The  error  into  which  they  have  inadvert- 
ently drifted,  of  allowing  too  much  motive-power  on  the  more 
self-insuring  policies,  and  the  other  borrowed  error  of  putting 
the  surrender  charge  on  the  wrong  basis, — making  it  in  re- 
gard to  what  has  been  paid,  instead  of  what  is  to  be  paid, — 
will  certainly  be  corrected  in  due  time.  They  only  wait  the 
waking  up  of  a  little  disinterested  discussion.  When  that  is 
aroused,  there  will  also  disappear  that  other  original  excres- 
cence of  insuring  lives  beyond  threescore  and  fifteen.  There 
will  be  no  use  of  issuing  savings-bank  policies  beyond  that 
limit,  because  they  would  be  sure  to  surrender  then,  if  not 
sooner, — unless  the  disease  of  which  Methuselah  died  is  to 
become  epidemic. 

Explanation  of  Tables. — Most  persons  perceive  the  relation 
to  each  other  of  lines  more  readily  than  of  numbers.  Hence 
a  complicated  problem  which  fails  to  be  understood  when 
stated  by  numerals,  or  other  symbols,  may  often  be  made  in- 
telligible to  everybody  by  diagrams  or  chalking  on  a  black- 
board. 

Mathematical  experts  in  life  insurance  will  smile  at  the 
clumsiness  of  the  following  illustrations,  but  they  should  re- 
member there  was  a  time  before  they  became  familiar  with 
algebra,  when  this  ladder  would  have  been  the  easiest  way  to 
the  spot  where  they  now  stand.  It  is  not,  however,  designed 
for  them,  but  for  persons  having  only  the  commonest  knowl- 
edge of  arithmetic,  and  eyes  to  recognize  the  proportion  of 
things. 


ii 6  Politics  and  Mysteries  of 

A  man  commonly  insures  a  certain  sum  on  his  life,  just  as 
he  does  on  his  house,  by  paying  the  same  premium  yeas  after 
year.  Yet  the  risk  of  a  loss  on  the  life  is  very  different  at 
different  ages,  while  that  of  one  on  the  house  commonly  re- 
mains the  same.  It  is  this  paying  for  a  variable  risk  with  a 
constant  premium,  which  is  the  peculiarity  of  life  insurance 
and  the  source  of  all  its  mystery.  The  natural  way  would 
be  to  make  the  premium  vary  from  year  to  year  according  to 
the  variation  of  the  risk,  but  this  variation  is  so  peculiar,  as 
we  shall  presently  see,  that  this  natural  way  is  hardly  practi- 
cable. 

By  the  Actuaries'  Rate  of  Mortality,  which  does  not  differ 
materially  from  any  other  used  for  the  purpose  of  insuring 
life,  the  average  probability  of  dying  at  any  age  is  given  from 
10  to  100,  beyond  which  there  is  assumed  to  be  no  chance  of 
living  worth  taking  into  account.*  If  the  question  be,  how 
to  insure  for  life  $  1,000  on  a  healthy  person  aged  32,  let  us 
first  try  the  natural  method.  He  has,  according  to  our  as- 
sumed scale  of  mortality,  68  possible  years  to  live.  Let  us 
(see  Plate  I.)  divide  the  line  A  B  into  68  equal  parts  to  repre- 
sent his  future  years  of  life.  Let  the  perpendicular  line  A  C 
and  the  68  perpendiculars  parallel  to  it  be  divided  into  100 
equal  parts  by  lines  drawn  parallel  to  the  base,  and  let  each 
of  these  perpendicular  parts  represent  10  units,  so  that  the 
whole  height  of  the  parallelogram  may  represent  either  one 
thousand  persons  or  one  thousand  dollars,  as  we  please.  If 
the  perpendiculars  represent  one  thousand  persons  living  to 
commence  the  ages  from  32  to  100,  the  series  of  heavy  black 
lines  standing  on  A  B,  being  very  short,  increasing  very  grad- 
ually at  first,  and  faster  and  faster  by  and  by,  will  nearly  rep- 
resent the  number  of  persons  expected  to  die  out  of  1,000  at 
each  age.  In  other  words,  the  ratio  of  the  thick,  dark  part  of 
the  perpendicular  to  the  whole  of  it,  at  each  age,  is  the  risk 

*  See  Appendix  for  Actuaries*  Rate  of  Mortality,  and  the  natural  pre- 
miums, at  four  per  cent. 


Life  Insurance.  117 

of  dying  at  that  age,  though  not  exactly.  In  point  of  fact, 
the  thick,  black  lines  standing  on  the  base  are  drawn  on  the 
supposition  that  the  whole  height  represents  $1,000,  and  the 
heavy  lines  represent  not  exactly  the  risks  at  each  age  but  the 
advance  costs  of  the  risks  at  four  per  cent.  Thus  at  the  age 
of  32  the  risk  of  dying  within  a  year  is  as  8.75  to  1,000. 
Hence  to  settle  the  death-claims  at  the  end  of  the  year,  sup- 
posing interest  at  four  per  cent.,  each  person  insured  at  the 
age  of  32  must  pay  at  the  beginning  of  the  year  what  will 
amount  at  that  rate  at  the  end  of  it  to  $8.75  to  insure  $1,000, 
viz.,  $8.41.  The  first  heavy  black  line  at  the  foot  of  A  C  is 
intended  to  represent  $8.41,  the  net  cost  (net  because  it  pro- 
vides for  no  expense  but  the  claim)  of  insuring  $1,000  up  to 
the  age  of  33.  The  next  heavy  black  line  at  age  33,  repre- 
sents $8.58,  the  net  cost  of  insuring  $1,000  till  the  age  of  34, 
and  so  on.  The  heavy  line  on  age  99  represents  $961.54  the 
net  cost  of  insuring  $1,000  in  the  year  in  which  the  death  is 
assumed  to  be  certain.  With  these  increasing  net  costs  paid 
annually  in  advance,  together  with  a  proper  addition  for 
working  expenses,  the  company  could  agree  to  insure  the 
$1,000  for  life,  if  it  could  only  depend  upon  members  enough 
continuing  to  pay,  to  constitute  a  fair  basis  of  average.  But 
looking  at  the  dark  curve  of  net  costs  of  insuring  a  whole 
$1,000,  growing  steeper  and  steeper,  it  is  easy  to  see  that  this 
natural  method  of  insurance  would  soon  come  to  a  natural 
death  by  the  healthy  members  ceasing  to  pay. 

If  we  apply  it  to  a  policy  payable  at  a  certain  age  or  pre- 
vious death  (see  Plate  II.)  we  shall  find  that  the  costs  of  in- 
suring the  $1,000  at  each  age  are  just  the  same  as  before,  till 
the  last  year,  when  as  the  claim  is  certainly  to  be  paid  at  the 
end  of  that  year,  $961.54  must  be  paid  at  the  beginning  of  it. 
This  sort  of  endowment,  is  of  course  too  steep  for  practice. 

Now,  let  us  return  to  tiie  long  policy,  payable  at  100  or 
previous  death  (by  the  assumption  used  in  determining  the 
premium)  and  consider  the  long  ago*  discovered  method  of 


n8  Politics  and  Mysteries  of 

getting  over  this  difficulty,  by  substituting  for  the  ever  in- 
creasing net  costs  of  insuring  f  1,000  an  equivalent  constant 
net  premium.  Postponing  for  the  present  the  question  how 
this  equivalent  constant  premium  is  ascertained,  we  will  take 
it  for  granted  that  it  has  been,  and  see  what  its  effect  will 
be. 

At  the  age  of  32  the  constant  net  annual  premium  equiv- 
alent to  the  increasing  series  of  net  costs,  standing  on  A  B 
(Plate  I.)  is  $18.04,  represented  by  A  P  on  the  perpendicular 
A  C.  It  seems  hardly  possible  that  this  can  be  so,  and  his- 
tory as  well  as  the  judgment  of  the  eye  would  seem  to 
contradict  it.  But  history  would  have  had  nothing  to  say, 
if  the  companies  had  always  taken  proper  care  of  the  dif- 
ference between  the  f  18.04  and  the  $8.41  (or  rather  $8.33), 
instead  of  squandering  it  in  needless  expenses. 

Let  us  suppose  the  company  to  consist  of  84,831  mem- 
bers. (See  scale  of  Living  and  Dying  in  Appendix.)  It  is 
plain  that  if  each  paid  $18.04  instead  of  $8.41,  the  742  who 
die  the  first  year  would  pay  in  advance  towards  their  own 
claims  742  times  $9.63,  or  $7,145.46,  more  than  on  the  other 
plan.  This  would  be  so  much  saved  to  the  other  84,089 
members  and  would  be  about  8^  cents  each,  so  that  their 
insurance  would  cost  them  only  about  $8.32J  instead  of 
$8.41.  Consequently  the  company  would  have  on  hand  from 
each  member  $18.04— $8.32Ji=$9.71£  as  reserve,  which  at 
the  end  of  the  year  at  four  per  cent,  would  amount  to 
$10.10.  Let  a  star  be  placed  on  the  second  perpendicular 
which  marks  the  age  33,  so  that  the  portion  of  it  inter- 
cepted between  the  star  and  the  base  shall  be  to  the  whole 
of  it  as  $10.10  to  $1,000.  Plainly  the  company's  risk  this 
first  year  has  not  been  $1,000,  as  it  would  have  been  if  only 
$8.41  had  been  paid,  but  $1,000— $10.10=$989.90.  For  as 
$1,000  is  to  $8.41  so  is  $989.90  to  48.32J,  or  $8.33,  to  write 
to  the  nearest  cent,  the  cost  of  the  insurance  as  we  have 
already  seen.  Again,  at  the  end  of  the  second  year  the 


Life  Insurance.  119 

reserve  from  another  difference  and  the  former  one  will 
have  accumulated  to  $20.53,  which  is  marked  by  a  star  on 
the  perpendicular  at  the  age '34,  and  of  course  the  compa- 
ny's risk  the  second  year  will  be  but  $979.47.  And  as  $1,000 
is  to  $8.58  so  is  $979.47  to  $8.40,  the  cost  of  the  insurance 
the  second  year. 

In  this  way,  by  letting  the  lines  intercepted  between  the 
stars  on  the  perpendiculars  and  the  base  represent  the  re- 
serves that  arise  from  funding  the  excesses  of  the  net  con- 
stant premium  over  the  costs  of  insurance,  we  have  the 
$1,000  always  divided  into  the  risk  borne  by  the  company, 
which  in  case  of  a  claim  is  to  be  made  up  out  of  the  costs 
of  insurance  of  the  surviving  members,  and  the  risk  borne 
by  the  party  himself,  which  is  wholly  paid  out  of  the  re- 
.  serve  or  fund  arising  from  his  past  payments  beyond  the 
cost  of  insurance.  The  effect  of  substituting  for  the  natural 
increasing  scale  of  premiums  the  equivalent  constant  pre- 
mium is  to  restrict  the  company's  risks — if  it  reserves  prop- 
erly— to  the  decreasing  series  of  lines  intercepted  between 
the  stars  and  the  line  C  D,  while  the  increasing  series  of  lines 
between  the  stars  and  the  base  is  the  domain  of  the  self-in- 
surance or  savings  bank.  The  annual  advance  cost  of  the 
insurances  done  by  the  company  are  laid  off  as  dark  lines 
downward  from  the  top  of  the  parallelogram,  and  they  al- 
ways bear  the  same  ratio  to  the  part  of  the  coinciding  per^ 
pendicular  above  the  star,  that  the  dark  line  at  the  base  does 
to  the  whole.  If  we  lay  off  the  constant  net  premium  $18.04 
from  top  C  P  and  draw  a  line  through  P'  parallel  to  the  top, 
we  shall  easily  see  how  the  series  of  constant  premiums,  C  F, 
is  equivalent  to  the  risks  actually  borne  by  the  company, 
for  it  exceeds  the  cost  of  the  insurance  for  thirty  years.  Thus 
the  first  rash  judgment  of  the  eye  is  corrected.  But  every- 
thing depends  upott  the  integrity  of  the  reserve.  Should 
this  not  be  maintained,  we  can  see  by  comparing  the  con- 
stant net  premium  with  the  increasing  ones  for  the  whole 


i2o  Politics  and  Mysteries  of 

sum,  as  represented  at  the  base  of  the  parallelogram,  that  it 
very  soon  becomes  insufficient  to  carry  the  risk  of  the  whole 
$1,000. 

The  policy  represented  in  the  diagram  on  Plate  I.  of  which 
the  analysis  is  given  in  a  subsequent  note,  is  usually  called  a 
whole-life  policy,  though  in  regard  to  its  premium  and  reserve, 
it  is  in  reality  an  endowment  insurance  policy  payable  at  the 
age  of  100  or  previous  death.  With  a  very  slight  enhance- 
ment of  the  premium  it  could  be  made  payable  at  75  or  pre- 
vious death.  Really  the  constant  net  annual  premium  (let 
this  be  taken  for  granted  at  present)  is  only  f  19.05.  (See 
Table  No.  2  for  a  complete  analysis  of  this  policy.)  Turn  to 
Plate  II.  Fig.  1,  and  we  shall  see  the  heavy  lines  representing 
the  net  costs  of  insuring  $1,000,  on  the  natural  method,  the 
same,  as  far  as  the  policy  goes,  as  in  the  long  policy  of  Plate  L 
The  stars  placed  on  the  perpendiculars  to  represent  the  height 
at  successive  ages  of  the  series  of  reserves  (Table  No.  2),  here 
rise  *a  little  more  rapidly  than  in  the  former  case,  thus  so 
much  more  reducing  the  risks  borne  by  the  company  that  the 
series  of  "  normal  costs  of  insurance  "  (insurance  done  by  the 
company)  and  represented  by  the  series  of  heavy  lines  at 
the  top  of  the  parallelogram  is  much  smaller.  This  leaves  a 
larger  part  of  the  net  premium  to  be  deposited  in  the  savings 
bank. 

"  As  has  been  already  and  cannot  be  too  often  remarked,  a 
policy  payable  at  75  or  previous  death  ought  to  be  regarded 
as  a  whole-life  policy,  because  it  covers  the  whole  of  life 
which  is,  as  a  general  rule,  insurable.  The  extravagant  risks 
which  come  after  that  age,  no  matter  how  much  reduced  in 
magnitude  by  the  reserve,  have  commonly  no  insurable  in- 
terest to  justify  them.  And  the  policy  would  almost  never 
be  kept  up  beyond  that  age,  if  an  equitable  surrender  value 
could  be  obtained  for  it. 

If  we  consider  in  the  same  way  the  policy  payable  at  45  or 
previous  death  (Plate  II,,  Fig.- 2),  which  is  fully  analyzed  in 


Life  Insurance.  121 

Table  No.  3,  we  shall  find  a  still  more  remarkable  diminution 
of  the  insurance  done  by  the  company,  and  increase  of  the 
self-insurance  or  savings-bank  element.  Here  the  constant 
net  premium  equivalent  to  all  the  net  costs  of  insuring 
f  1,000,  represented  by  the  heavy  perpendiculars  on  the  base 
will  be  $62.87  ;  and  it  may  be  worth  while  now  to  consider 
how  this  is  ascertained,  because  in  this  case  the  calculation 
is  the  same  in  method,  though  not  so  tedious  in  its  extent, 
as  in  the  others. 

The  present  value  of  a  dollar  to  be  paid  a  certain  number 
of  years  hence, — say  ten  years, — provided  a  person  now  aged 
32  is  then  living,  depends  upon  two  things :  the  interest  of 
money  and  the  probability  at  that  age  of  living  ten  years.  If 
life  were  certain,  it  would  be  simply  a  dollar  discounted  at 
compound  interest  for  ten  years,  which  at  four  per  cent, 
would  be  about  67|  cents ;  or  more  precisely,  .675564.  But 
the  probability  at  32  of  living  ten  years  (see  Rate  of*Mortality 
in  the  Appendix)  is  expressed  by  the  ratio  of  the  number 
living  by  the  scale  at  42  to  the  number  living  at  32,  thus : 
•Jrtii  5  so  ^na^  ^ne  present  value  of  a  dollar,  at  4  per  cent., 
when  contingent  on  the  chance  of  a  person  aged  32  being 
alive  to  pay  it  at  the  end  of  ten  years,  is  $J$J?  of  f 0.675564, 
which  is  about  f  0.6 133.  In  the  following  table,  column  A 
gives  the  present  values  of  a  dollar,  found  in  this  way,  to  be 
paid  in  each  of  the  13  years  of  the  term,  if  the  party  is  alive 
to  pay  it,  beginning  with  the  f  1  paid  at  the  start.  The  sum 
of  these  values  is  $9.8692.  Column  B  gives  the  advance  net 
costs  of  insuring  f  1,000,  as  laid  down  in  the  short,  heavy  per- 
pendiculars on  the  base,  together  with  the  tall  one  of  the  be- 
ginning of  the  last  year — the  premiums  of  the  natural  method. 
Each  dollar  in  this  column,  B,  referred  back  to  the  start,  is 
worth  the  portion  of  a  dollar  standing  against  it  in  column  A. 
Hence,  multiplying  the  values  in  B  by  the  fractions  in  A, 
gives  the  values  at  the  start  of  all  the  natural  •premiums  in 
B ;  and  their  sum  is  f  620.44.  This,  on  the  two  assumptions 

5 


122 


Politics  and  Mysteries  of 


of  mortality  and  interest,  is  the  sum  which,  paid  at  the  start, 
would  be  precisely  equivalent  to  all  the  natural  premiums  of 
B,  considering  separately  the  chances  of  the  party  being  alive 
to  pay  them  when  due.  Now  as  f  9.8692  is  to  $1,  so  is  $620.44 
to  $62.866,  the  equivalent  constant  net  annual  premium  to 
insure  $  1,000,  payable  at  45  or  previous  death. 


AGE. 

A 

B 

C 

I> 

E 

32, 

1. 

8.41 

8.41 

7.93 

7.93 

33, 

.9531 

8.58 

8.18 

7.57 

7.22 

34, 

.9083 

8.75 

7.95 

7.18 

6.52 

35, 

.8654 

8.93 

7.73 

6.74 

5.84 

36 

.8244 

9.12 

7.52 

6.26 

5.16 

37, 

.7852 

9.31 

7.31 

5.72 

4.49 

38, 

.7477 

9.53 

7.13 

5,13 

3.84 

39, 

.7118 

9.74 

6.93 

4.48 

3.19 

40, 

.6775 

9.96 

6.75 

3.75 

2.54 

41, 

.6447 

10.20 

6.58 

2.95 

1-90 

42,      » 

.6133 

10.48 

6.43 

2.07 

1.27 

43, 

.5833 

10.82 

6.31 

1.10 

.64. 

44, 

.5545 

961.54 

533.21 

- 

- 

9.8692 

620.44 

50.54 

It  is  essential  in  every  such  calculation,  where  compound 
interest  is  concerned,  to  treat  every  payment  separately,  as  in 
the  case  above  cited.  Hence  the  tediousness  of  the  process, 
when  the  possible  payments  are  very  numerous,  unless  resort 
is  had  to  abridged  methods,  in  which  the  reasons  are  con- 
cealed. 

Now  having  ascertained  the  constant  net  annual  premium 
equivalent  to  the  natural  ones  in  this  short  "  endowment  in- 
surance," as  it  is  called,  we  shall  find  that  those  we  assumed 
in  the  other  cases  can  be  found  in  the  same  way  ;*  and  the 
three  cases  differ  from  each  other  in  no  respect  whatever,  ex- 
cept in  the  different  ratios  of  the  insurance  to  the  self-insur- 
ance. In  the  first  case,  where  the  term  was  68  years,  and  the 


Lrfe  Insurance.  123 

constant  net  annual  premium  $18.04,  the  reserve  increases  so 
that  the  company's  risks  are  the  black  lines  at  the  top,  instead 
of  those  at  the  bottom.  But  on  account  •  of  the  enormous 
risks  of  the  years  beyond  75,  even  the  lines  at  the  top  become 
at  length  more  than  twice  as  large  as  the  constant  net  pre- 
mium, so  that  they  absorb  the  whole  of  it,  and  a  part  of  the 
interest  on  the  reserve.  In  other  words,  the  annual  deposit 
in  the  savings  bank  becomes  negative  (see  Table  No.  1  in  the 
note) ,  so  that  the  curve  of  stars  denoting  the  height  of  the 
reserve,  which  began  by  increasing  so  rapidly  as  to  have  its 
concavity  upward,  slackens  its  rate  of  increase  and  turns  its 
concavity  downwards  from  about  75.  Cutting  off  these  enor- 
mous risks  and  closing  the  policy  at  75,  has  the  effect  of  so 
diminishing  the  company's  risks  that  no  part  of  the  interest 
on  the  reserve  (unless  the  entry  is  at  a  very  early  age)  is  in 
any  year  required  to  meet  the  normal  costs  of  carrying  those 
risks,  as  is  plain  enough  from  the  diagram  .(Plate  II.  Fig.  1) 
and  from  the  Table  No.  2.  HencB  with  the  very  slight  increase 
of  the  constant  net  premium  from  $18.04  to  f  19.05,  the  re- 
serve amounts  to  the  whole  sum  insured  in  43  years. 

In  case  the  policy  is  closed  at  45  (Table  No.  3,  and  Plate 
-II.  Fig.  2) ,  the  great  preponderance  of  the  self-insurance  has 
the  effect  of  making  the  insurance  done  by  the  company  al- 
most incredibly  smali,  as  represented  by  the  stubby  little 
dark  lines  at  the  top  of  the  parallelogram.  If  we  ascertain 
•  the  value  of  these  insurances  by  the  company  at  the  start,  we 
shall  find  that  less  than  one  of  the  net  premiums  .(f  62.87)  will 
pay  for  the  whole  of  them.  This  may  be  easily  done  by  re- 
curring to  the  foregoing  table,  where  column  D  gives  the 
normal  costs  of  these  successive  company's  risks.  If  they  are 
all  referred  to  the  start,  by  multiplying  each  by  the  corre- 
sponding present  value  of  a  dollar  in  column  A,  we  shall  have 
in  column  E  the  present  values  of  the  whole,  the  sum  of 
which  is  $50.54,  which  may  be  called  the  insurance  value  of 
the  policy.  We  have  already  found  that  the  single  advance 


124  Politics  and  Mysteries  of 

net  premium,  equivalent  to  the  whole  of  the  natural  ones,  is 
$620.44.  If  we  subtract  from  this  the  $50.54,  we  shall  have 
$569.90  as  the  advance  value  of  the  self-insurance  or  savings- 
bank  business  on  the  policy.  Thus  we  see  that  in  this  policy 
the  savings-bank  or  self-insurance  element  is  a  little  more 
than  eleven  times  as  great  as  the  insurance  element.  If  we 
apply  a  similar  calculation  to  the  policy  payable  at  death  or 
75,  we  shall  find  that  the  advance  cost  of  the  insurance  to  be 
done  by  the  company  is  $174.70,  and  of  that  to  be  done  by  the 
party  himself  is  $156.50.  Here  the  savings-bank  element  is 
not  so  great  as  the  insurance  element  by  more  than  ten  per 
cent.  In  the  policy  payable  at  death  or  100,  the  advance 
value  of  the  insurance  element  will  be  found  to  be  $204.42, 
while  that  of  the  savings-bank  element  is  only  $114.89  ;  or  a 
little  more  than  one-third  of  the  whole. 

It  seems  quite  obvious  from  these  considerations,  that  if  a 
company  consists  of  policies  having  so  wide  a  variety  in 
regard  to  the  proportion  in*Which  these  two  elements  enter 
into  them,  it  must  be  quite  necessary  to  equity  that  the  two 
elements  should  be  kept  distinct,  and  that  while  the  insurance 
part  of  the  business  is  managed  on  correct  insurance  princi- 
ples, the  savings-bank  part  of  the  business— just  so  far  as  it  is 
such — should  be  managed  on  savings-bank  principles.  This 
is  the  aim  of  these  tables.  * 

Though  prepared  with  a  good  deal  of  care,  they  undoubt- 
edly contain  a  multitude  of  errors,  which  seem  to  have  a  fatal  ' 
facility  of  creeping  into  such  a  work.  It  is  hoped,  however, 
that  most  of  them  are  so  small  that  if  laid  off  on  the  diagrams 
we  have  been  explaining  they  would  not  be  perceptible  to 
the  naked  eye,  in  which  case  they  will  not  be  of  great  practi- 
cal damage. 

There  is  added  in  a  note  (Table  No.  1)  a  full  analysis  of 
the  policy  illustrated  in  Plate  L,  for  the  sake  of  showing  why' 
it  should  never  be  sought  for  or  issued*  This  must  be  obvi- 
ous to  any  one  who  carefully  compares  this  table  with  Table 


Life  Insurance.  125 

No.  2,  or  with  any  of  the  other  tables  of  policies  issued  at  the 
same  age. 

The  reason  why  policies  have  not  heretofore  been  issued  to 
any  great  extent  with  a  precisely  stipulated  cash  surrender 
value  is  that  there  has  been  no  great  public  demand  for  them. 
And  there  has  been  no  such  demand  because  the  public  did 
not  well  understand  the  mq^t  desirable,  convenient  and  equi- 
table form  of  life  insurance.  Our  companies  are  numerous,  and 
all  of  them  ready  to  accommodate  the  public  with  almost 
every  conceivable  form  of  policy,  often  making  concessions 
much  more  inconvenient  if  not  hazardous  to  the  company 
than  any  proposed  in  these  savings-bank  insurance  policies. 
If  any  healthy  and  insurable  person  should  offer  to  any  com- 
pany to  take  any  one  of  these  268  policies,  with  surrender 
value  stipulated  according  to  the  last  column  of  the  table, 
it  must  be  uncommonly  dull  in  its  appetite  for  business  or 
obtuse  in  its  perception  of  its  own  interests  to  decline. 

The  greater  part  of  our  life-insurance  companies,  including 
some  of  the  most  prosperous  and  useful,  have  indulged  the 
public  in  a  concession  much  less  conservative  than  that  of 
stipulating  the  cash  surrender  value  proposed,  to  wit,  that  of 
taking  a  considerable  part  of  the  premium  in  notes  from  the 
start.  If  the  surrender  value  stated  in  the  last  column  of 
these  tables  is  all  that  can  be  fairly  conceded  with  such  pre- 
miums, then,  plainly,  no  part  of  the  premium  should  be  taken 
in  notes  till  the  year  at  the  end  of  which  there  is  a  sur- 
render value,  and  then  not  beyond  such  value.  Against  this 
surrender  value  the  note,  of  course,  is  as  good  an  asset  to  the 
company  as  any  other.  Beyond  this,  it  is  hazardous  or 
doubtful. 

The  premium  note,  as  has  been  already  remarked,  and  as 
everybody  knows,  is  in  effect  a  surrender  value  stipulated, 
for  in  case  of  discontinuance  it  is  never  collected.  In  regard 
to  justice  and  fair  dealing  it  is  sometimes  too  much  and 
sometimes  too  little.  In  regard  to  equity  between  part-note 


126  Politics  and  Mysteries  of 

payers  and  all-cash  payers,  there  can  be  none  unless  the  lat- 
ter are  paid,  when  they  discontinue,  as  much  cash  as  the 
former  are  paid  notes,  when  the  reserve  is  the  same.  There 
has  never  existed  any  rule  to  this  effect.  The  notes  are  a 
source  of  great  disappointment  to  simple-minded  policy- 
holders.  They  should  only  be  resorted  to  in  an  emergency 
to  tide  the  policy  over  a  shallows  place  in  a  man's  income. 
Resorted  to  from  the  start  they  have  the  effect  of  substituting 
for  a  constant  premium,  securing  a  fixed  sum  to  the  widow, 
an  increasing  premium  securing  a  diminishing  sum.  A  ter- 
rible deception  is  practised  upon  the  public  in  making  people 
believe  that  the  surplus  will  so  far  wipe  out  the  notes,  as  to 
make  the  policy  as  good  as  one  paid  for  in  cash.  If  this  were 
true,  a  man  might  become  rich  by  depositing  his  notes  in  a 
savings  bank.  The  only  cases  where  a  premium-note  policy 
is  as  good  as  one  paid  for  in  cash,  are,  first,  when  the  party 
can  get  more  interest  on  the  deposit  part  of -his  premium  out 
of  the  company  than  in  it,  and  second,  when  he  wishes  to  dis- 
continue and  the  company  will  not  give  a  cash  surrender 
value  equal  to  the  note.  If  he  gives  for  a  policy  all  the  cash 
he  can  spare  and  a  note  besides,  he.  runs  a  serious  risk  of 
being  obliged  to  relinquish  his  policy  when  he  needs  to  keep 
it  up. 

The  savings-bank  insurance,  with  stipulated  cash  surrender 
value,  and  margins  adjusted  to  an  equitable  assessment  of 
expenses,  gives  a  person  the  best  possible  chance  of  getting 
all  the  insurance  he  needs  at  a  fair  cost,  without  being  obliged 
ever  to  pay  for  more  than  he  needs.  Under  the  present  non- 
forfeiture plans,  whether  secured  by  stipulation  or  legislation, 
the  person  who  becomes  unable  or  unwilling  to  pay  further 
premiums,  gets  as  his  surrender  value  only  some  more  insur- 
ance. This  is  better  than  nothing,  but  may  not  be  so  good  as 
the.  money.  For  an  obvious  reason  the  company  cannot  pay 
money  or  insurance  at  the  option  of  the  party  at  the  time  of 
discontinuance,  though  it  might  have  stipulated  either  the  one 


Life  Insurance.  127 

or  the  other  at  his  option  declared  at  the  start.  But  if  the 
party  gets  the  cash  surrender  value  stipulated  at  the  start,  he  is 
all  right  in  any  event.  For,  taking  the  example  in  Table  No.  2, 
suppose  he  has  paid  ten  premiums  and  finds  himself  unable  to 
pay  the  eleventh.  If  he  has  ceased  to  need  further  insurance 
he  receives  $101.79  in  cash ;  he  would  have  received  not  more 
than  $ 60  or  $80  if  it  had  not  been  stipulated  in  the  policy.  If 
he  does  need  further  insurance  and  is  in  good  health,  the 
company  will  doubtless  lend  him  a  premium  or  two  on  the 
security  of  his  surrender  value,  rather  than  have  the  policy 
drop.  But  suppose  his  health  is  bad,  so  that  the  company 
had  rather  pay  the  $101.79  and  have  the  policy  drop.  It  is 
good  security  for  that  in  the  money  market,  so  that  the  party 
is  sure  to  be  able  to  borrow  on  it  outside  of  the  company  to 
keep  it  in  force.  Thus,  provided  he  needs  the  insurance,  he 
can  by  means  of  the  cash  surrender  value  stipulation,  oblige 
the  company  to  furnish  it  to  the  extent  of  88^  per  cent,  of  his 
reserve.  Under  the  present  Massachusetts  law  to  regulate 
the  forfeiture  of  policies  he  can  get  further  insurance  only  to 
the  extent  of  80  per  cent,  of  his  reserve,  whatever  it  may  be. 
Under  this  law,  of  course,  he  fares  a  little  better,  as  to  te- 
tter insurance,  when  the  reserve  is  quite  small.  But  it  fails 
in  a  great  measure  to  protect  him,  in  that  respect,  when  his 
reserve  is  large,  and  altogether  when  he  needs  the  money 
more  than  the  insurance. 

The  reader,  it  is  to  be  hoped,  if  he  has  a  family  dependent 
on  his  earnings,  will  not  fail  to  take  one  more  look  at  these 
diagrams,  and  by  noticing  how  small  an  annual  payment 
creates  a  fortune  to  leave  behind  him,  become  impressed  with 
the  manly  resolution  to  lose  no  time  in  securing  one. 


128 


Politics  and  Mysteries  of 


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Life  Insurance. 


129 


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Politics  and  Mysteries  of 


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132  Politics  and  Mysteries  of 


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Life  Insurance.  133 

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136 


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Life  Insurance.  137 

With  the  exception  of  short-term  policies,  which 
are  frequently  of  great  convenience,  no  others  are 
really  required  besides  such  as  may  be  fully  pre- 
calculated  in  two  or  three  hundred  tables  like  Nbs. 
2,  3  and  4  above.  For  example,  a  joint  policy  is 
never  necessary,  for  if  two  persons  are  insurable 
and  wish  to  insure  for  each  other's  benefit,  the  pre- 
mium which  would  be  paid  for  the  joint  policy, 
payable  to  the  survivor  on  the  death  of  either,  may 
be  divided  between  two  policies,  one  on  each  life. 
Then  when  one  becomes  a  claim,  the  other  may  be 
surrendered,  and  the  survivor  will  be  as  much  bene- 
fited as  if  the  policy  had  been  that  present  pest  of 
the  offices,  a  joint  one.  This  arrangement  would 
naturally  lead  the  officers  to  look  after  the  insura- 
ble interest  of  each  party  in  the  other,  instead  of 
contenting  themselves,  as  at  present,  with  finding 
one  insurable  interest  for  the  two  risks. 

These  Savings  Bank  Insurance  Tables  are  offered 
to  the  public  as  a  practical  solution  of  the  impor- 
tant problem,  how  to  conduct  the  business  and  ad- 
just the  premiums  of  long  and  short  term  endow- 
ment insurances,  so  that  no  one  can  afford  to  put 
the  difference  between  the  premiums  of  the  two  for 
the  same  amount  at  the  same  age  in  a  pure  savings 
bank,  and  take  the  longer  term  in  the  insurance 
company ;  in  other  words,  how  to  make  the 
increase  of  the  self-insurance  on  a  given  policy 
diminish  the  cost  of  the  insurance  by  the  company, 


138  Politics  and  Mysteries  of 

instead  of  increasing  it  as  is  now  the  case.  Under 
the  old  system,  the  increase  of  the  self-insurance  on 
a  given  policy  diminishes  the  amount  of  the  insur- 
ance done  by  the  company,  but  enhances  materially 
the  cost  of  what  is  done.  The  consequence  of  this 
is,  that  many  thrifty  young  people  who  only  need 
insurance  for  the  ten  or  twenty  years  in  which  they 
will  be  accumulating  a  competence,  neglect  insur- 
ance altogether  and  patronize  the  savings  bank  pure 
and  simple* 

The  stock,  or  non-participating  life  insurance 
companies  need  the  solution  of  this  problem,  no  less 
than  the  mutual  ones.  Such  a  company  will  give 
a  whole-life  policy  for  $1,000  to  a  person  aged 
30,  for  an  annual  premium  of  $16.55,  and  an  en- 
dowment insurance,  for  the  same  amount,  payable 
at  40  or  previous  death,  for  an  annual  premium  of 
$87.55,  a  difference  of  $71  per  annum. 

Now  if  money  is  worth  six 'per  cent,  per  annum, 
and  a  savings  bank  can  be  found  that  will  accumu- 
late it  at  that  rate,  the  insured  party  by  taking  the 
ten-year  endowment  instead  of  taking  the  whole-life 
policy  and  putting  the  $71  per  annum  into  the 
savings  bank,  simply  throws  away  $25.66  at  the 
start,  even  supposing  that  the  whole-life  policy  at 
the  end  of  ten  years,  the  party  being  then  alive, 
should  have  no  value  at  all.  To  make  it  in  any 
measure  expedient  to  take  the  ten-year  endowment 
insurance  in  a  stock  company,  in  preference  to  the 


Life  Insurance.  139 

longer  policy,  the  premium  of  the  former  must  be 
reduced  to  $84.14,  if  not  lower.  If  any  consider- 
able arithmetical  knowledge  on  this  subject  should 
get  afloat  in  this  country  it  would  be  impossible  for 
stock  life  insurance  to  flourish  without  adopting  a 
savings-bank  system,  in  which  the  profits  of  the 
stock  shall  be  confined  to  the  saving  of  cost  on  the 
insurance  done  by  the  company,  while  the  self-in- 
surance should  be  regarded  as  savings-bank  deposit, 
withdrawable  subject  to  a  fair  charge  proportionate 
to  insurance  value. 

Inasmuch  as  life  insurance  under  a  law  fixing  the 
reserve  is  a  union  of  insurance  and  savings  bank, 
and  the  company  when  issuing  endowment  policies 
is,  in  the  last  year  of  every  such  policy,  a  simple 
trust  company,  doing  no  insurance  at  all,  it  is  not 
easy  to  see  why  it  should  not  exercise  savings-bank 
powers  in  any  case  when  it  is  expedient.  This 
would  be  a  great  convenience  and  simplification  of 
business.  Many  people  find  it  difficult  to  pay  the 
whole  annual  premium  of  a  policy,  especially  an 
endowment  policy,  at  once.  And  this  leads  to 
splitting  the  premium  into  semi-annual,  quarterly 
and  monthly  payments,  a  very  great  inconvenience 
to  the  company  for  reasons  which  it  is  unnecessary 
here  to  dwell  on.  The  company  can  much  more 
easily  accommodate  such  people  by  deferring  the 
issue  of  an  insurance  policy  till  it  has  received  sim- 
ple savings-bank  deposits  sufficient  to  pay  a  full 


140  Politics  and  Mysteries  of 

annual  premium  in  advance.  Then  let  any  pay- 
ments that  can  be  made  during  the  first  policy  year 
be  received  as  simple  savings-bank  deposits  to  be 
applied  with  interest  to  the  payment  of  the  next 
annual  premium  when  it  becomes  due. 

Chapter  V. 

REDUCTION  OF  KATES. 

In  the  latter  part  of  1872  the  officers  of  the  lead- 
ing Mutual  Life  Insurance  Company  proposed  a 
serious  reduction  of  the  premiums.  This  produced 
a  public  discussion,  the  result  of  which  proved  that 
autocracy  in  life  insurance  is  far  from  being  synony- 
mous with  omnipotence.  Some  of  the  incidents 
and  mysteries  of  this  discussion  will  be  noticed  in 
a  subsequent  chapter.  The  following  letter  was 
intended  to  justify  the  writer's  dissent  from  any 
such  reduction  as  that  proposed : — 

EEPLY  TO  MR.  WHITE. 

To  the  Editors  of  the  -Hartford  Courant. 

At  your  invitation,  the  secretary  of  the  Charter  Oak  Life 
Insurance  Company,  in  your  issue  of  December  14,  produces 
an  argument  in  favor  of  the  lately  proposed  reduction  of 
rates  by  the  Mutual  Life  Insurance  Company  of  New  York, 
in  the  course  of  which  he  alludes  to  me  in  the  following  lan- 
guage :  "  Mr.  Wright's  position  towards  the  Mutual  Life  is 
very  astonishing,  when  it  is  well  known  that  for  some  time 
past  he  has  persistently  urged  a  plan  of  insurance  upon  the 
companies  which,  on  large  classes  of  policies,  does  not  pro- 


Life  Insurance.  141 

Tide  for  anything  like  the  amount  of  expenses  which  is  fur- 
nished by  the  new  rates  of  the  Mutual  Life.  He  now  objects 
to  a  '  loading '  on  endowment  insurances,  considerably  more 
than  his  own  plans  contemplate,  as  being  unsafe.  If  it  is  so, 
what  sort  of  an  adviser  is  Mr.  Wright  to  be  considered  when 
he  urges  his  oWn  plans  with  so  very  little  margin  for  ex- 
pense that  only  one  company  has  as  yet  been  induced  to  use 
them?" 

He  also  says  of  me,  in  connection  with  two  other  persons, 
that  I  am  on  record  in  favor  of  that  which  I  now  condemn. 

It  is  not  that  I  differ  with  him  in  regard  to  the  reduction  of 
rates,  or  to  defend  myself  against  what  I  deem  to  be  a  per- 
sonal injustice,  but  to  explain  a  matter  in  which  the  public 
has  a  deep  interest  that  has  thus  far  been  left  out  of  sight  in 
this  discussion,  that  I  ask  space  in  your  columns  to  reply  to 
this. 

Mr.  White  cannot  possibly  be  so  severe  on  me  in  regard  to 
my  past  short-comings  as  Tarn  on  myself.  But  I  prefer  to 
tell  the  story  of  my  own  guilt,  and  confess  my  real  crime. 
It  will  then  be  seen  that  I  am  quite  innocent  of  ever  advocat- 
ing such  3,  reduction  as  the  Mutual  Life  proposed. 

Though  the  premiums  charged  by  the  Mutual  Life  Insur- 
ance Company  have  never,  in  my  opinion,  been,  on  the  whole, 
too  high,  it  is  quite  undeniable  that  some  of  them  are  un- 
necessarily high  in  relation  to  others.  In  truth  there  was 
committed,  long  before  I  was  born,  and  before  life  insurance 
was  born  in  America,  a  blunder  in  what  is  called  "  loading 
the  premiums,"  which,  of  course,  extended  to  agents'  com- 
missions and  the  assessment  of  expenses  among  the  mem- 
bers. This  was  adopted  unwittingly  in  this  country,  with 
most  of  the  other  rules  and  practices  of  the  business.  It 
did  not  become  very  apparent  or  troublesome  till  we  had 
gone  largely  into  the  practice  of  issuing  endowment  policies. 
Then,  when  it  was  attempted  to  distribute  surplus,  either  on 
the  percentage  or  "  contribution  "  plan,  the  most  astounding 


142  Politics  and  Mysteries  of 

and  unsatisfactory  results  developed  themselves,  I,  for  one, 
discovered  that  something  had  got  wrong  end  foremost,  but  I 
was  unable  to  see  what,  or  how  to  set  it  right.  I  carefully 
explored  the  literature  of  the  British  Institute  of  Actuaries, 
but  got  no  help  from  'that.  Hints  of  the  trouble  were  given 
in  the  ninth  Report  of  the  Massachusetts  Instance  Commis- 
sioners in  1864  (see  Reports  with  Appendix,  1865,  pages  274 
and  366).  By  about  1869,  when  the  blunder  was  cheating 
people  out  of  millions,  for  nobody's  benefit  but  the  agents1, 
all  at  once  the  right  way  of  assessing  expenses,  compensating 
the  agents,  and  keeping  the  accounts  of  a  life-insurance*com- 
pany  dawned  upon  me.  Not  to  have  discovered  this  before 
was  intensely  and  almost  intolerably  mortifying.  For  nobody 
more  heartily  than  I  had  recommended  endowment  insurance 
policies.  Tens  of  thousands  had  taken  them,  and  on  the  short 
terms  had  been  as  good  as  cheated,  every  mother's  son  of 
them.  And  I  had  ignorantly  acquiesced  in  the  stupid  and 
stupendous  blunder  by  which  this  was  brought  about !  I 
could  have  torn  the  hair  off  from  the  top  of  my  head,  if  there 
had  been  any  there  and  it  would  have  done  any  good.  And 
yet  I  was  as  sure  as  ever  that  endowment  policies  were  the 
right  ones  to  take,  if  they  could  be  dealt  by  equitably  as  to 
their  expenses. 

Nobody  would  have  been  gladder  than  I  to  have  had  my 
discovery  proved  a  mistake.  And  I  will  pay  a  handsome  re- 
ward to  any  one  who  will  do  it  now.  I  saw  then,  and  see 
now,  that  the  companies  that  have  trusted  me  as  their  adviser 
are  in  danger  of  coming  to  grief,  not  by  want  of  funds  but  by 
want  of  equity  within  themselves.  On  this  account  I  called 
together  my  brother  actuaries  in  1870,  at  the  Mutual  Life 
Office  in  New  York,  in  presence  of  Mr.  Winston,  and  some  of 
his  directors,  and  had  the  method  of  loading  premiums  and 
assessing  commissions  and  expenses  discussed.  I  think  it 
was  unanimously  agreed  by  the  actuaries  present,  that  the 
old  procedure  was  wrong,  and  the  only  question  was  how 


Life  Insurance.  143 

without  alienating  the  agents,  who  are  interested  in  the  pres- 
ent exorbitant  commissions  on  endowment  policies,  the  base 
could  be  changed  from  premium  to  '•  insurance  value."  It 
was  concluded  that  the  thing  was  only  possible  by  a  concert 
of  action  of  the  leading  companies,  and  I  understood  Mr. 
Winston  to  promise  that  he  would  endeavor  to  have  a  con- 
vention of  the  executive  officers  of  such  companies  assembled 
for  that  purpose.  They  never  assembled. 

I  have  urged  the  calling  of  such  a  convention,  upon  sev- 
eral companies,  with  all  my  might.  For  I  felt  that  such  a 
blunder,  affecting  one  of  the  grandest  institutions  of  modern 
civilization,  must  be  corrected.  But  Mr.  White  is  not  quite 
correct  in  saying  that  I  have  urged  MY  plan  of  doing  it  upon 
any  individual  company,  and  not  at  all  correct  when  he  insin- 
uates that  only  one  company  has  adopted  my  plan,  because  it 
has  "  so  very  little  margin  for  expense."  The  contrary  will 
appear  by  and  by. 

I  have  not  urged,  but  simply  offered,  as  a  sin-offering,  freely 
to  all  companies  who  will  take  it,  a  plan  founded  "on  equity,  to 
which  no  objection  has  yet  been  offered  except  this :  It  does 
not  in  any  case  give  or  provide  for,  a  commission  to  the  agent 
larger  than  the  company  and  the  policy-holder  himself  can 
'  afford,  and  therefore  the  agent  will  not  work  it.  The  present 
fact  is,  that  on  any  other  plan  in  any  company,  the  agent  gets 
a  larger  commission  just  about  in  the  ratio  that  the  policy  is 
worth  less  to  the  company,  and  so  large  on  short  terms  that 
no  man  but  a  fool  or  a  dupe  ever  takes  one.  Why,  will  be 
plainer  by  and  by. 

The  ordinary  mind  commonly  fails  to  understand  the  sub- 
ject I  am  talking  about,  because  the  law  of  human  mortality 
extends  over  so  many  years  ^nd  is  complicated  with  com- 
pound interest.  The  equities  would  be  just  the  same  in  kind 
if  life  were  shorter  and  money  yielded  no  interest.  Hence 
the  easiest  way  to  understand  them  will  be  to  take  a  hypo- 
thetical law  of  mortality,  confined  to  a  very  small  number  of 


144  Politics  and  Mysteries  of 

years,  and  suppose  the  rate  of  interest  zero.  Let  us,  for  ex- 
ample, suppose  that  life  could  last  at  longest  but  four  years, 
and  that  one  out  of  four  will  die  the  first  year,  one  out  of 
three  the  second,  one  out  of  two  the  third,  and  the  rest  in  the 
fourth  year.  This  law  of  mortality  is  expressed  by  the  series  ' 
^  i?  ^  ^.  Now  if  we  take  a  mutual  life  insurance  company 
of  four  members,  all  entering  in  the  first  year  of  age,  each 
insuring  for  $1,000,  the  normal  or  natural  net  premiums 
will  be  as  follows : — 

1st  year, $250  00 

2d  year, 333  33 

3d  year, 500  00 

4th  year, 1,000  00 

This  increasing  series  of  premiums  would  be  objectionable, 
for  reasons  too  obvious  to  mention.  How  can  we  make  the 
premiums  constant  or  level  ?  Obviously  as  much  must  be 
paid  one  way  as  the  other  to  meet  the  aggregate  of  death- 
claims,  which  will  be  $4,000.  Of  the  level  premiums,  what- 
ever they  may  be,  there  will  be  four  paid  the  first  year,  three 
the  second,  two  the  third  and  one  the  last,— in  all,  ten, — so  that 
each  must  be  $400.  This  will  give  the  company  $600  the 
first  year  beyond  the  one  death-claim  and  of  course  it  must 
be  held  in  reserve  for  the  future.  The  three  premiums  paid 
the  second  year  will  leave  $200  to  be  added  to  the  reserve 
from  the  first,  making  it  $800.  The  income  of  the  third  year 
will  be  $800,  making  it  necessary  to  take  $200  from  the  re- 
serve, thus  leaving  it  $600,  which  with  the  $400  received  the 
fourth  year  will  pay  the  last  death-claim,  and  would  just  as 
well  pay  it,  if  the  man  should  continue  to  live,  in  violation  of 
the  law.  As  to  the  premiums  and  necessary  reserve  from 
each,  under  this  law,  it  would  make  no  difference  whether 
the  number  entering  the  first  year  were  four  or  more.  Each 
living  member  must  then  have  a  reserve,  as  follows :  at  the 
end  of  the 


Life  Insurance.  145 

1st  year, $200  00 

2dyear,  .                 .  •      .        .        .        .  400  00 

3d  year, 600  00 

4th  year, 1,000  00 

This  is  as  much  as  to  say,  the  party  paying  $400  the  first 
year,  compared  with  one  paying  the  normal  premium  of  $250 
for  $1,000  of  insurance  from  the  company,  really  insures  him- 
self to?  $200,  and  the  company  only  insures  him  the  comple- 
mentary $800  at  the  normal  premium  of  \  or  $200.  The  next 
year  he  insures  himself  $400  and  pays  the  company  the  nor- 
mal rate  of  J,  or  $200,  for  carrying  the  complementary  risk  of 
$600.  The  third  year  he  insures  himself  $600,  and  paysjihe 
company  the  normal  rate  of  \  or  $200,  for  carrying  the  com- 
plementary risk  of  $400.  The  last  year  he  insures  himself 
the  whole  $1,000,  for  if  there  were  any  number  of  living 
members,  entered  subsequently,  not  one  of  them  would  have 
to  contribute  a  dime  to  his  claim.  And  let  it  be  observed 
that  the  reserve  of  a  living  member  never  has  to  be  touched 
to  pay  the  claim  of  a  dead  one.  That  is  always  made  up  out 
of  the  normal  insurance  premiums  of  himself  and  the  living 
members  that  year,  and  his  own  reserve,  or  self -insurance. 
This  is  a  financial  necessity  of  substituting  a  constant  or  level 
premium  for  the  natural  increasing  premium,  which  admits 
no  reserve  out  of  the  net  premium.  It  does  not  become  any 
less  a  necessity  if  legislation  steps  in  and  compels  it. 

Under  such  a  statute,  at  any  rate,  the  contract  naturally 
resolves  itself  into  two  things,  very  distinct  in  kind,  and  which 
cannot  be  confounded  or  left  mixed  up,  when  policies  of  dif- 
ferent terms  and  conditions  are  issued,  without  making  the 
wildest  work  with  equity. 

Distinguishing  the  successive  self-insurances  from  the  in- 
surance by  the  company,  we  have  under  the  level  premium 
the  two  following  series : — 


146 


Politics  and  Mysteries  of 


SELF-INSURANCE  . 

INSURED  BY  COMPANY. 

YEAR. 

Deposit. 

Sum. 

Premium. 

Sum. 

1,          .         .         . 

$200  00 

$200  00 

$200  00 

$800  00 

2          ... 

200  00 

400  00 

200  00 

600  00 

3,        ... 

200  00 

600  00 

200  00 

400  00 

4,         ... 

400  00 

1000  00 

— 

.  — 

This  is  a  whole-life  policy  on  our  miniature  mortality  table, 
without  interest  or  expense.  Let  us  see  how  it  would  be  on 
the  same  hypothesis  with  a  three-year  endowment  insurance, 
which  would  be  calculated  just  as  if  two  instead  of  one  died 
in  the  third  year.  Then  there  would  be  only  nine  of  the 
net  level  premiums  to  meet  $4,000,  and  of  course  each  would 
be  $444.44  about,  and  the  contract  would  resolve  itself  into 
two,  as  follows : — 


SELF-INSURANCE. 

INSURED  BY  COMPANY. 

YEAE. 

Deposit. 

Sum. 

Premium. 

Sum. 

1,          .         .         . 

$259  25 

$259  25 

$185  19 

$740  75 

2,         ... 

296  29 

555  54 

148  15 

444  46 

3,         ... 

444  44 

1000  00 

°~ 

~* 

If  it  were  a  two-year  endowment  insurance,  the  net  pre- 
mium would,  in  the  same  way,  be  found  to  be  $571.43.  And 
the  contract  would  resolve  itself  into  two,  as  follows : — 


YEAR. 

SELF-INSURANCE. 

INSURED  BY  COMPANY. 

Deposit. 

Sum. 

Premium. 

Sum. 

1, 
2,         ... 

$428  57 
571  43 

$428  57 
1000  00 

$142  86 

$571  43 

Life  Insurance.  147 

Now  there  is  no  provision  on  any  of  these  contracts  for 
expenses,  so  if  there  are  to  be  any,  some  provision  must  be 
made  for  them  in  addition  to  the  net  premium.  And  if  the 
law  is  not  absolute  as  to  the  number  dying  each  year,  but 
only  approaches  the  assumption  as  the  numbers  are  greatly 
multiplied,  there  must  be  some  addition  on  that  account,  es- 
pecially if  legislation  has  stepped  in  and  in  effect  forbidden 
any  policy's  reserve  to  be  used  to  meet  any  claim  but  its  own. 
How  shall  this  addition  be  made  ? 

Observe  that  the  self-insurance  fund  is  a  pure  matter  of  de- 
posit, occasioning  no  risk  to  the  company.  Indeed  the  greater 
it  is  in  relation  to  the  policy  the  less  is  the  company's  risk. 
If  it  yields  interest,  as  it  always  does  in  practice,  then  a  small 
part  of  that  interest  will  be  sufficient  to  pay  the  expense  of 
taking  care  of  it  as  it  would  in  any  other  bank.  Hence  there 
is  no  occasion  to  increase  the  provision  for  expenses  on  ac- 
count of  this  part  of  the  contract,  nor  for  any  apprehended 
excess  of  mortality,  for  there  is  no  risk  incurred  by  it  on  the 
part  of  the  company. 

It  is  only  in  regard  to  the  insurance  parts  of  these  contracts 
that  the  respective  net .  premiums,  $400,  f  444.44  and  $571.43, 
need  to  be  increased  at  all.  And  why  should  they  not  be  in- 
creased in  proportion  to  the  insurance  to  be  done  by  the  com- 
pany under  such  contracts,  that  is,  the  insurance  value  of 
each  ?  This  is  the  practical  question  now  before  every  life- 
insurance  company  in  this  country,  and  it  is  several  times 
more  important  than  any  other,  for  other  things  depend  on  it. 
By  the  antiquated  blunder  of  which  I  have  spoken,  not  the 
slightest  regard  was  paid  to  the  insurance  value  of  the  con- 
tract in  deciding  the  question  of  addition  for  expenses,  or 
"  loading,"  as  it  is  called.  Indeed  the  thing  was  wholly  ig- 
nored, and  either  a  fixed  percentage  of  the  net  premium  was 
added  to  itself  or  one  arbitrarily  graded,  but  always  produc- 
ing, most  absurdly,  the  largest  margin  on  the  largest  premium 
relative  to  a  given  amount  of  policy. 


148 


Politics  and  Mysteries  of 


Under  the  hypothesis  above,  the  insurance  value  of  the  first 
or  whole-life  policy  is  found  thus :  The  value  of  the  first  risk 
of  $800,  is  $200  in  hand.  There  are  three  chances  out  of  four 
of  having  the  second  risk  of  $600  to  carry  for  $200  which  is 
worth  $150,  and  there  are  two  chances  out  of  four  of  having 
the  third  risk  of  $400  to  carry  for  $200,  which  is  worth  $100. 
So  that  the  insurance  value  of  the  first  or  whole-life  policy  is 
$450 ;  of  the  three-year  endowment,  $296.30 ;  of  the  two-year 
endowment,  $142.86. 

These  insurance  values  at  the  start  measure  the  interest  of 
the  respective  policies  in  the  company  as  an  insurance  com- 
pany and  the  additions  for  insurance  expenses  and  mortality 
contingency  should  plainly  be  in  proportion  to  them.  Sup- 
pose we  need  an  addition  or  loading  to  the  whole-life  pre- 
mium of  $90.  This  is  20  per  cent,  of  the  insurance  value,  and 
equity  demands  simply  that  the  same  percentage  of  the  insur- 
ance values  of  the  other  policies  should  be  added  to  their  net 
premiums,  making  them  respectively  $490,  $503.70  and  $600. 
But  the  old  blunder  starting  with  the  same  premium  on  the 
whole-life  policy,  and  loading  by  a  percentage  of  22-|  per 
cent,  of  itself  to  make  it,  would  make  the  premiums  $490, 
$544.44  and  $700,  thus  giving  the  shortest  endowment  policy 
which  has  the  least  insurance  by  the  company,  besides  its 
larger  expense  on  its  larger  deposit,  the  butt  end  by  $100  of 
the  insurance  expenses.  Look  at  it  thus,  and  ponder  on  it. 


THE  EQUITABLE  THING. 

THE  ANCIENT  BLUNDER. 

Gross 
Premium. 

Margin. 

Gross 
Premium. 

Margin. 

Life,    . 
3-year  Endow.,  , 
2-year  Endow.,  . 

$490  00 
503  70 
600  00 

$90  00 
59  26 
28  57 

$490  00 
544  44 
700  00 

$90  00 
100  00 
128  57 

Life  Insurance.  149 

Here  is  the  fountain  of  the  present  trouble  with  life  insur- 
ance. It  is  not  the  excessiveness  of  the  premiums,  but  the 
violation  of  equity  in  loading  them.  And  even  this  would  do 
no  practical  mischief,  however  theoretically  absurd,  if  the 
companies  did  not  proceed  to  assess  insurance  expenses,  be- 
ginning with  agents'  commissions,  in  the  same  way,  and  then 
aggravate  the  iniquity,  whenever  an  already  overtaxed  mem- 
ber seeks  to  withdraw,  by  basing  the  surrender  charge  as  ab- 
surdly on  the  self-insurance  instead  of  the  insurance  value. 
This  it  is  that  has  brought  matters  to  such  a  pass  that  an  old 
actuary  hardly  dares  to  turn  a  street  corner  suddenly,  lest  he 
should  meet  an  irate  short-endowment  victim  who  will  break 
more  than  one-tenth  of  the  decalogue  over  his  head.  The 
blunder  once  found  out  is  almost  as  ridiculous  as  it  would  be 
to  harness  our  horses  tail  foremost,  and  would  go  out  of  use 
as  speedily,  but  for  the  sanction  that  has  been  given  to  it  by 
long  usage,  and  the  cheek  of  that  cheekiest  of  all  apostles, 
the  life-insurance  agent. 

If  I  have  succeeded  in  establishing  in  the  reader's  mind  the 
distinction  between  the  self-insurance  and  the  insurance  done 
by  the  company,  which  takes  place  in  widely  and  ever- 
varying  proportions  under  every  policy,  he  is  now  prepared 
to  appreciate  the  actual  figures  of  the  case,  to  be  astounded 
•  at  Mr,  Winston's  attempted  coup  (Petal  and  still  more  at  the 
libellous  utterance  of  the  Charter  Oak  against  the  proposed 
system  of  Savings  Bank  Life  Insurance.  I  give  below  the 
present  premiums  of  the  Mutual  Life  for  a  policy  of  $1,000, 
payable  at  a  given  age  or  on  previous  death  and  the  proposed 
premiums  with  their  respective  margins  over,  or  additions 
to,  the  net  premiums  by  the  American  Mortality  at  four  per 
cent.,  and  the  savings-bank  premiums,  proposed  by  me  for 
the  same  policies,  with  their  margins  over  the  Actuaries',  at  four 
cent.,  which  are  of  course  a  little  less  than  they  would  be, 
compared  with  the  American  Mortality. 


Politics  and  Mysteries  of 


Policy  for  f  1,000,  at  the  age  of  40,  payable  at  a  Given  Age  or 
Previous  Death. 


SAVINGS  BANK. 

MUTUAL  LIFE. 

AGE  OP 
PAYMENT. 

Proposed 

Present 

Premium. 

Margin. 

Premium. 

Margin. 

Premium. 

Margin. 

50, 

$89  97 

$4  11 

$94  00 

$854 

$106  90 

$21  44 

65, 

5921 

4  44 

59  60 

5  42 

69  49 

15  31 

60, 

45  48 

5  27 

43  36 

3  94 

51  78 

1236 

65 

38  65 

6  31 

34  50 

3  14 

42  10 

10  74 

70, 

35  32 

7  40 

29  45 

2  68 

36  91 

10  14 

75, 

34  01 

8  51 

26  66 

2  42 

33  68 

9  44 

96  or  100, 

3403* 

10  35 

24  58 

2  23 

31  30 

8  95 

The  premium  for  the  longest  term  under  the  Savings  Bank 
system  being  larger  by  thirty-three  cents  than  the  present 
Mutual  Life  premium  for  the  same  term,  it  is  pretty  evident 
that  the  Charter  Oak  is  mistaken  in  saying  that  the  compa- 
nies— except  one — have  declined  my  plan  because  it  has  "  so 
very  little  margin  for  expenses."  If  the  present  life  rates  are 
safe  and  have  margin  enough  for  expenses,  without  the  aid  of 
endowment-insurance  policies,  then  the  savings-bank  rates 
prepared  by  me  have  margin  enough,  if  the  commissions  and  • 
expenses  are  assessed  equitably,  and  it  is  an  essential  feature 
of  the  system  that  they  shall  be.  On  the  contrary,  it  will  be 
perfectly  evident,  I  trust,  on  inspection  of  the  figures  above, 
that  Mr.  Winston's  proposed  reduction,  now  so  happily  de- 
feated, worked  as  it  must  have  been  on  the  old  plan  of  as- 
sessing commissions  and  expenses  on  premiums,  could  not 
possibly  succeed  except  at  a  considerable  sacrifice  by  the  old 
members,  and  supposing  it  could,  still,  inevitably,  the  long 

*  This  is  what  a  whole-life  premium  would  be  on  the  Savings  Bank 
plan.  In  fact,  it  is  not  proposed  to  issue  this  absurd  policy  under  it, 
but  to  stop  at  75. 


Life  Insurance.  151 

policies  would  unjustly  burden  the  short  ones — which  is  as 
much  as  to  say  that  it  could  not  possibly  succeed  unless  the 
expenses  can  be  reduced  to  little  or  nothing  and  the  stock  of 
fools  be  largely  increased  in  the  land. 

ELIZUK  WRIGHT. 
BOSTON,  December  18, 1872. 


Chapter  VI. 

*  BLACK  AND  WHITE  MAIL. 

The  effect  on  the  free  American  press  of  some 
two  hundred  life-insurance  companies,  hungrily 
competing  with  each  other  in  every  considerable 
city  and  village  of  the  thirty-seven  States  and 
twelve  Territories,  is  a  most  interesting  study.  The 
multiplication  of  policy-holders  is  a  necessity  of 
the  business.  The  dispersion  of  the  risks  over  a 
wide  extent  of  surface  is  a  great  advantage,  tend- 
ing to  neutralize  the  effects  of  local  epidemics. 
Hence  every  company  seeks  to  recommend  itself 
everywhere  through  the  press,  national  and  local. 
Its  agents  are,  if  possible,  everywhere.  They  are 
nothing,  if  they  do  not  advertise. 

There  are,  doubtless,  multitudes  of  conscientious 
editors,  general  and  special,  of  greater  or  less 
ability,  who  aim  to  give  the  people  trustworthy 
information  on  every  subject  which  concerns  them, 
without  regard  to  advertising  patronage.  But  if 
any  one  carefully  surveys  the  field,  early  and  late, 
in  regard  to  life-insurance,  he  will  find  marvel- 


152  Politics  and  Mysteries  of 

lously  little  evidence  of  their  existence.  He  will 
probably  find  no  subject  whatever,  of  any  social 
importance,  on  which  American  journalism  has 
done  itself  so  little  credit.  The  utterances  of  the 
press  have  been  sufficiently  abundant,  but  their 
character  has  generally  been  unreliable,  if  not  con- 
temptible. In  fact,  the  American  press,  in  regard 
to  life  insurance  may  be  almost  exhaustively 
divided  into  the  two  classes  of  the  black-mailers 
and  the  white-mailers.  The  former  needs  no 
description.  The  executive  officers  of  the  com- 
panies feel  themselves  at  the  mercy  of  certain 
advertising  organs  of  no  use  to  them,  and  look  at 
them  with  as  much  dismay  as  Pharaoh  did  at  the 
multiplying  plagues  sent  upon  him.  So  far  as 
dishonestly  conducted  companies  are  concerned,  the 
black-mail  press,  though  an  unlovely,  is  doubtless 
a  sanitary  institution.  But  it  operates  with  quite 
as  much  if  not  more  success  on  companies  of  the 
best  intentions.  This  they  owe  entirely  to  the 
mystery  in  which  their  proceedings  are  enveloped. 
They  find  it  cheaper  to  buy  silence  on  things  which 
they  hardly  understand  themselves  than  to  explain 
them  to  the  public. 

But  the  white-mailers,  always  lovely  and  sapo- 
naceous, are  more  dangerous  to  the  people.  They 
are  watch-dogs  that  never  bark  at  all  till  it  is  too 
late.  They  do  not  procure  advertisements  by 
threats.  But  they  allure  them  by  flatteries- which 


Life  Insurance.  153 

do  a  hundred  times  more  mischief.  Iir  regard  to 
such  profitable  advertisers  as  the  life-insurance 
companies,  particularly  the  most  autocratic,  the 
motto  of  the  white-mail  press  is,  nil  nisi  bonum. 
It  is  only  when  the  companies  publicly  fall  out  with 
each  other  that  the  white-mail  press  ventures  any- 
thing like  criticism,  and  then  it  usually  betrays 
more  ignorance  than  conscience. 

The  relation  of  life  insurance  to  the  press  is  well 
illustrated  by  what  happened  in  New  York  in ' 
December,  1872,  when  the  Mutual  Life  Insurance 
Company  of  that  city  proposed  to  reduce  its  rates 
on  all  policies  ^without  regard  to  the  fact  that  most 
of  them  were  already  too  low,  unless  the  company 
should  sacrifice  old  and  retiring  members  for  the 
benefit  of  new  ones.  The  announcement  was 
made  with  a  prodigious  flourish  of  advertising 
trumpets  and  at  enormous  expense.  It  was  well 
calculated  to  strike  terror  into  the  hearts  of  other 
companies  that  were  not  in  a  condition  to  'saddle 
upon  an  immense  body  of  old  members,  with  an 
accumulation  of  $60,000,000,  the  expense  of  get- 
ting and  maintaining  new  business  with  inadequate 
premiums.  And  it  did  it.  These  companies  ob- 
tained the  opinions  of  professional  experts,  and 
rushed  into  print.  Of  course  at  a  large  expense. 
The  advertising  war  raged  for  a  week  or  two.  It 
rained  golden  manna  on  the  press,  from  both  sides. 
For  the  mighty  autocracy  which  provoked  the 

7* 


154  Politics  and  Mysteries  of 

war  was  not  to  be  put  down  by  the  opinions  of  two 
or  three  humble  experts,  who  could  easily  be  black- 
guarded within  an  inch  of  their  lives.  During  the 
melee  the  leading  New  York  papers  delivered 
themselves  of  opinions  in  a  most  unwonted  and 
oracular  manner,  taking  sides,  on  the  whole,  with 
the  allied  host  which  opposed  the  reduction  of 
premiums,  but  betraying  an  amusing  unconscious- 
ness of  the  question  which  lay  at  the  bottom  of  the 
controversy,  as  to  the  rights  of  the  policy-holder  in 
his  own  accumulation,  or  self -insurance. 

As  the  writer  was  somewhat  mixed  up  in  -this 
fight  he  had  an  opportunity  to  learn  ja  certain  fact, 
which  may  serve  as  a  key  by  which  any  one  suffi- 
ciently curious  may  estimate  pretty  accurately  its 
cost  to  the  companies  concerned.  As  one  of  the 
experts  whose  opinion  had  been  published  by  the 
allied  companies,  he  with  the  others  was  made  the 
subject  of  a  libellous  and  rather  scurrilous  attack 
emanating  from  the  Mutual  Life  office,  pretending 
to  be  from  "A  POLICY-HOLDER"*  of  that  company, 
and  undoubtedly  by  its  money  inserted  in  nearly  all 
the  New  York  papers.  To  this  he  offered,  per- 
sonally, through  the  New  York  "Evening  Post" 
the  following  reply.  A  sub-editor  of  that  journal 
who  was  present  in  its  office  could  not  assure  the 
writer  that  it  would  he  inserted  as  a  matter  of  jus- 

*  Understood  to  be  an  officer  of  the  company  also. 


Life  Insurance. 


155 


tice,  because  the  article  to  which  it  was  a  reply  had 
probably  been  paid  for,  though  it  was  not  in  the 
advertising  columns.  The  writer  observed  that 
it  seemed  a  queer  rule  to  exact  pay  for  a  defence 
against  a  libellous  attack  because  the  publisher  had 
made  money  by  it,  but  requested  that  the  reply 
should  be  published  at  any  rate  and  the  bill  sent  to 
him  in  Boston.  It  appeared  in  the  "  Evening  Post " 
of  December  13,  1872,  in  a  mutilated  condition,  an 
important  sentence  being  omitted,  and  a  bill  was 
rendered  charging  61  dollars  for  the  61  lines  it 
occupied.  This  was  returned,  saying  that  the  bill 
would  be  cheerfully  paid  when  the  reply  was 
printed  correctly.  With  the  utmost  politeness,  the 
"Post,"  in  its  issue  of  December  18,  then  repeated 
the  publication  as  follows,  and  the  voucher  for  the 
final  settlement  will  be  found  in  a  foot-note,*  charg- 
ing for  122  lines  inserted  once  instead  of  61  twice. 

[From  the  New  York  Evening  Post,  Dec.  18, 1872.] 

ELIZUR  WRIGHT  ON  INSURANCE  RATES. 
The  following  letter  we  printed  in  the  "  Evening 
Post"  a  few  days  ago  with  an  important  omission. 


*  Mr.  ELIZUR  WRIGHT, 


To  The  Evening  Post,  Dr. 


Lines. 

Times. 

Rate. 

Amount. 

1872. 

Dec.    18, 

To  advertising  Card, 

122 

1 

$0  50 

.  $61  00 

Please  remit.        Received  payment  for  Wm.  C.  Bryant  &  Co., 

THEO.  S.  WEEKS. 


156  Politics  and  Mysteries  of 

We    now  print    it  corrected    in    justice   to  Mr. 
Wright  :— 

To  the  Editors  of  the  Evening  Post: — A  "  Policy-holder  "  in 
your  issue  of  December  11  is  disturbed  in  his  mind,  or  has  a 
mind  to  disturb  the  public,  because  certain  actuaries,  of  whom 
I  am  one,  have  disapproved  the  reduction  of  rates  in  the 
Mutual  Life,  having  previously  approved  as  low  rates  for 
stock  companies.  It  is  on  this  difference  of  opinion  in  the 
two  different  cases  that  he  wants  to  know  whether  we  are 
"  consulting  actuaries  "  or  "  consulting  weathercocks."  This 
is  good  as  it  stands.  If  "Policy-holder"  has  been  in  the 
Mutual  Life  long  enough  to  be  insuring  himself  about  half 
the  face  of  his  policy— and,  if  he  does  not  understand  what 
this  means,  perhaps  Professor  Bartlett  will  explain  it  to  him 
— and  he  wishes  now  to  play  stockholder  gratis  to  new  mem- 
bers paying  only  stock  rates,  God  forbid  that  I  should  forbid. 
On  the  contrary,  I  admire  his  self-sacrifice. 

But  to  back  up  his  "  weathercock  "  theory  on  me,  specially, 
this  "  Policy-holder  "  resorts  to  a  falsehood  and  gross  garbling 
of  my  words.  This  is  the  way  he  puts  it : — 

"  Elizur  Wright,  speaking  of  the  advantages  of  low  rates 
to  the  policy-holders,  says : — 

" 4  It  is  marvellous  how  little  it  is  considered  that  the  more 
you  pay  in  advance,  the  more  you  insure  yourself!  the  more 
you  have  to  pay  beyond  your  just  share  of  the  expenses.'" 

The  only  place  wh|re  I  have  used  language  resembling 
this  is  in  a  note  at  the  bottom  of  page  366  of  the  reprint  of 

"MASSACHUSETTS  REPORTS  ON  LjIFE  INSURANCE,  1859—1865, 

WITH  AN  APPENDIX."  *    I  was  not  there  "  speaking  of  the 
advantages  of  low  rates,"  and  what  I  did  say  was  this : — 

"  It  is  marvellous  how  little  it  is  considered  that  the  more 
you  pay  in  advance  the  more  you  insure  yourself.  And  how 

*  A  work  now  out  of  print,  and  the  plates  melted  in  the  late  fire. 


Life  Insurance. 


'57 


the  more  you  insure  yourself  in  most  companies,  the  more 
you  have  to  pay  beyond  your  just  share  of  the  expenses." 

This  was  aimed  not  against  high  premiums  in  a  Mutual 
company,  for  it  had  nothing  to  do  with  high  or  low  rates, 
but  a  false  assessment  of  the  expenses  prevailing  in  too  many 
companies,  whereby  a  smaller  risk  is  made  to  bear  a  larger 
share  of  the  expenses  than  a  larger  one.  The  note,  as  quoted 
by  "  Policy-holder,"  is  not  very  pertinent  to  such  an  issue ;  as 
printed  by  me,  in  connection  with  the  text,  it  is  more  so.  It 
was  certainly  intended  to  inform  ancient  life  and  all  short- 
term  endowment  policy-holders,  that  whatever  might  be  their 
respective  premiums,  they  were,  in  most  companies,  paying 
more  in  comparison  with  other  members  than  their  just  share 
of  the  expenses.  So  patent  will  this  be  to  any  intelligent 
reader  who  examines  the  note  in  connection  with  the  text,  that 
he  will  bear  me  out  in  saying  this.  If  "  Policy-holder  "  does 
not  make  a  public  apology  for  this  falsification,  into  which  he 
may  have  fallen  unwittingly,  then  he  meant  fraud — "  while 
Truth  was  pulling  on  her  boots." 

ELIZUR  WRIGHT. 

BOSTON,  December  12, 1872. 

The  abusive  and  wilfully*  false  article  of  the 
anonymous  libeller  occupied  190  lines  in  the  "  Post," 
and  without  doubt  cost  the  Mutual  Life  Insurance 
Company,  $190.  It  was  inserted  in  a  large  num- 
ber of  other  journals  that  have  the  reputation  of 
being  more  mercenary  and  expensive  than  the 
"Post."  Any  one  at  all  acquainted  with  the  extent 
of  that  newspaper  war,  in  which  the  real  question 
at  issue  was  sedulously  kept  out  of  view  on  both 
sides,  will  have  no  difficulty  in  believing  that  the 
companies  disbursed  more  money  on  it  than  they 
*  *  No  apology  was  made. 


158  Politics  and  Mysteries  of 

do  on  fifty  average  widows.  After  all,  the  expendi- 
ture in  resistance  was  of  no  earthly  use,  for  it  was 
not  the  published  opinions  of  the- experts  or  of  the 
editors  that  did  the  business ;  but  the  fact  that 
some  of  the  policy-holders  of  the  Mutual  had  con- 
sulted able  lawyers  and  found  that  they  could,  and 
decided  that  they  would,  put  an  injunction  on  the 
company  if  the  absurd  and  inequitable  project  was 
persevered  in.  The  expensive  care  which  the 
foiled  trustees  of  the  Mutual  took  to  keep  from 
the  public  the  true  cause  of  their  defeat,  by  exten- 
sively advertising  a  humble  request  of  the  allied 
companies  that  they  would  suspend  their  reduction 
of  premium  for  the  present,  and  pretending  con- 
descendingly and  courteously  to  grant  it,  would  be  a 
very  amusing  illustration  of  the  high-mightiness  of 
bell-wetherism,  if  it  were  not  such  shameless 
trifling  with  sacred 'trusts  on  the  one  side,  and 
degrading  sycophancy  on  the  other.  The  whole 
thing  shows  that  the  press  in  regard  to  life  insur- 
ance, for  the  most  part  occupies  itself  either  as  a 
foul  bird  of  prey,  or  a  silly  decoy-duck.  This  is 
not  much  to  be  wondered  at,  and  it  is  not  worth 
while  to  spend  a  moment  in  deploring  it.  Money 
has  the  power,  under  certain  circumstances,  to 
reward  and  punish.  As  long  as  nobody  knows 
exactly  whose  it  is,  the  will  that  wields  it  has  its 
own  way  with  the  white-mail  press,  as  well  as  the 
black.  And  that  other  portion  of  the  press  which 


Life  Insurance.  159 

is  rigidly  honest,  and  about  as  ignorant  as  honest, 
will  take  care  to  avoid  libel  suits  by  entire  silence. 
But  money  is  not  omnipotent.  Once  solve  the 
problem  and  discover  the  key  which  dispels  the 
mystery  as  to  what  is  whose,  and  apply  a  little 
hydraulic  pressure,  and  not  all  the  money  of  all  the 
autocrats,  whether  trustors  or  trustees,  can  keep 
the  American  press  silent.  And  it  is  not  the 
argument,  but  a  little  money,  that  will  do  it.  As 
a  quart  of  water  may  be  made  to  lift  an  ocean,  so 
a  very  little  money  may  be  made  to  lift  from  the 
lips  of  the  American  press  that  ocean  of  life-insur- 
ance patronage  which  is  now  used  to  keep  concealed 
from  the  public  two  or  three  demonstrable,  and  to 
some,  profitable,  blunders. 

If  anybody  offers  a  prize,  of  say  $100,  for  a  new 
tract,  or  essay,  or  hymn,  or  method  of  destroying 
potato-bugs  or  the  like,  in  a  paragraph  of  moderate 
length,  it  will  generally  be  copied  gratuitously 
in  about  every  newspaper,  daily  and  weekly,  from 
one  end  of  the  Union  «to  the  other.  The  writer, 
after  having  become  convinced  by  the  New  York 
premium  war,  that  the  companies  on  both  sides, 
with  a  single  exception,  were  resolved  to  go  on 
perpetuating  the  old  blunders  in  every  policy  they 
issued,  thought  it  his  duty  to  try  the  hydraulic  pres- 
sure of  a  little  money.  And  this  he  did  not  by  ad- 
vertising, but  by  asking  editors  of  his  acquaintance 
to  publish  gratuitously  the  following  card  : — 


160  Politics  and  Mysteries  of 

A  PRIZE  OF  ONE  THOUSAND  DOLLARS. 
Three  questions  have  arisen  in  the  practice  of  life  insurance, 
of  great  interest  to  the  public : — 

1.  How  to  ascertain  the  proper  commissions  to  be  paid  to 
agents,  if  any  are  paid. 

2.  How  to  assess  the  office  or  working  expenses,  including 
commissions,  on  the  members  of  mutual  companies. 

3.  How  to  ascertain  the   equitable   surrender  value  of  a 
policy. 

A  new  system,  called,  for  want  of  a  better  name,  "  Savings- 
Bank  Life  Insurance,"  was  presented  by  me  to  life-insurance 
companies  and  the  public,  about  one  year  ago,  which  answers 
all  these  questions  in  a  way  radically  different  from  that  here- 
tofore practised  by  any  company. 

The  old  system  and  the  new  cannot  both  be  right.  Com- 
pared with  each  other,  on  these  three  points,  one  of  them  is 
probably  wholly  wrong  and  indefensible,  while  the  other  is 
an  approximation  to  the  right  thing. 

If  the  new  system  accords  with  science  and  reason ;  if  it 
is  in  the  main  and  in  principle  just  and  equitable  in  regard  to 
the  points  above  named,  then  the  old  one  violates  equity  in 
regard  to  every  one  of  them,  and  on  some  of  the  policies 
issued  falls  little,  if  any,  short  of  obtaining  money  by  false 
pretences. 

There  is  no  problem  of  social  science  more  worthy  of 
thorough  discussion  than  this. 

In  the  interest  of  policy-holders,  present  and  future,  and  to. 
stimulate  inquiry,  always  better  late  than  never,  into  the  pos- 
sibility of  improvement,  I  offer  A  PRIZE  OF  ONE  THOUSAND 
DOLLARS,  to  the  writer  who  will  first  demonstrate  that  the  old 
method  of  answering  either  of  the  three  questions  above  is 
more  correct,  reasonable  and  equitable  than  that  given  by  the 
"Savings-Bank  Insurance"  system  proposed  by  me.  This 
prize  will  be  paid  to  the  writer  who  first,  within  one  year 
from  this  date,  presents  his  or  her  demonstration  to  me,  in 


Life  Insurance.  161 

print,  with  the  certificate  either  of  Professor  Benjamin  Peirce, 
of  the  United  States  Coast  Survey,  or  of  Professor  William 
H.  C.  Bartlett,  Actuary  of  the  Mutual  Life  Insurance  Company 
of  New  York,  that  in  his  opinion  such  demonstration  is  con- 
clusive. And,  in  that  case,  either  or  both  of  these  gentlemen 
shall  be  duly  compensated  by  me  for  the  trouble  either  or 
both  of  them  may  have  taken  in  the  matter. 

ELIZTJR  WRIGHT. 
39  STATE  STREET,  BOSTON,  Jan.  13, 1873. 

Of  course  it  was  not  to  be  expected  that  such  a 
card  could  gain  any  considerable  publicity.  It  was 
sufficient,  however,  that  it  got  published  by  a  num- 
ber of  personal  friends  as  a  personal  favor.  It  in- 
fallibly reached  everybody  personally  interested 
in  maintaining  the  old,  and  to  them,  lucrative 
blunders.  Hence  it  is  really  equivalent  to  a  prize 
of  at  least  $100,000.  For  people  who  want  to  use 
other  people's  money  are  always  liberal  of  it,  and 
there  are  more  than  one  hundred  of  them  who  can 
easily  add  $1,000  each  to  this  prize.  If  there  is 
anybody  in  existence  who  can  win  it,  they  will  be 
sure  to  find  him  and  set  him  at  work,  if  the  fore- 
going card  has  not.  If  the  prize  is  won  and  paid, 
that  fact  \yill  be  published  fast  enough.  The  object 
will  be  gained,  for  the  public  and  the  press  will  then 
inevitably  discuss  and  decide  whether  it  was  fairly 
won.  If  it  is  not  won  by  the  13th  of  January, 
1874,  the  publication  of  this  volume  ensures  that 
that  fact  will  be  published  in  about  every  news- 
paper in  the  English  language.  It  will  be  decisive. 


1 62  Politics  and  Mysteries  of 

It  will  make  it  absolutely  certain  that  the  companies 
which  thereafter  adhere  to  the  old  errors  and  refuse, 
to  stipulate  a  reasonable  cash  surrender  value  will 
have  no  business  whatever  to  do  except  with  people 
who  either  wish  to  cheat  others  or  be  cheated 
themselves. 

Chapter  VII.  , 

A  WORD  TO  THE  LIFE-INSURANCE  AGENTS  OP  THE  UNITED 
STATES. 

[From  the  Insurance  Times.] 

GENTLEMEN  : — As  one  of  the  orders  of  men  whose  business 
it  is  to  persuade  other  men  to  provide  properly  for  their  fu- 
ture well-being  and  to  do  their  whole  duty,  I  believe  you 
have  on  the  whole  labored  as  hard  and  succeeded  as  well 
and  been  as  poorly  paid  as  any  other.  At  any  rate,  I  am 
proud  to  have  belonged  to  your  order.  But  a  clergyman  may 
be  proud  of  his  cloth,  without  denying  that  there  have  been 
false  prophets,  bad  priests,  and  scandalously  mercenary 
bishops. 

Life  insurance,  sweetening  every  night  the  sleep  of  mil- 
lions of  people  with  tired  brains  and  troubled  hearts,  and 
saving  from  utter  desolation  and  want  thousands  of  bereaved 
families  every  year,  is  a  fact  "which  could  not  have  existed 
but  for  the  life-insurance  agents.  When  the  world  has  be- 
come so  good  and  wise  as  not  to  need  gospel  preached  to  it, 
and  every  man  is  a  moral  law  unto  himself,  then  there  will 
be  no  need  of  life-insurance  agents—and  not  much  sooner. 

If  good  work  will  not  do  itself,  it  must  be  done  by  some- 
body. And  whoever  does  it  should  be  paid  according  to  his 
work. 

As  the  actuaries  of  the  past  have  adjusted  the  premiums  on 
the  various  kinds  of  life-insurance  policies  they  have  failed 
— and  I  am  sorry  to  have  to  include  myself  in  this  failure — 


Life  Insurance.  163 

to  notice  that  they  were  creating  two  distinct  kinds  of  busi- 
ness on  each  policy  that  should  be  paid  for  on  entirely  differ- 
ent principles. '  This  failure  to  recognize  the  correct  analysis, 
and  the  consequent  allowance  of  the  agent's  compensation 
"simply  as  a  percentage  of  the  premium,  part  of  which  is  for 
one  sort  of  business  and  part  of  which  for  an  entirely  differ- 
ent sort,  has  led  to  great  injustice.  The  blunder,  once  dis- 
covered, cannot  be  adhered  to,  without  ruining  the  business 
of  the  agents  as  well  as  of  the  companies. 

It  is  the  aim  of  "  savings-bank  life  insurance  "  to  correct 
this  blunder.  Whether  it  is  to  be  successful  or  not,  the  pub- 
lic has  yet  to  determine. 

The  only  objection,  theoretical  or  practical,  which  has  yet 
been  brought  against  savings-bank  life  insurance  is,  that 
under  it  the  agents  cannot  receive  so  large  a  percentage  of 
the  premiums  for  their  services.  This  is  undeniably  true  of 
some  of  the  policies,  such  as  short-term  endowments,  while 
of  some  of  the  policies  of  long  terms,  they  will  .perhaps  re- 
ceive a  little  larger  percentage  of  the  premium  than  they  do 
now.  The  fact  is,  that  while  the  commissions  on  the  latter 
class  of  policies  are  higher  than  they  used  to  be,  and  about 
high  enough,  those  on  the  former  are  scandalously  too  high. 
They  are  reactively  too  high,  and  the  agent  must  inevitably 
suffer  from  the  reaction  at  last.  The  commissions  given  for 
obtaining  policies  cannot  differ  much  from  a  fixed  percentage 
of  the  Insurance  Values  of  the  policies  obtained  without  pro- 
ducing intolerable  difficulties  in  making  the  dividends,  and 
pernicious  dissatisfaction  with  any  that  can  be  made.  If  the 
commission  is  a  fixed  percentage  of  the  insurance  value,  then 
it  is  necessarily  a  variable  percentage  of  the  premium,  be- 
cause for  any  given  age  and  amount  the  largest  premium  has 
the  smallest  insurance  value,  and  vice  versa. 
k  But  supposing  the  agent  does  on  the  whole  receive  less,  for 
a  given  amount  of  insurance,  or  premium,  it  by  no  means 
follows  that  savings-bank  life  insurance  will  not  be  more 


164  Politics  and  Mysteries  of 

,  profitable  to  him.  He  will  profit  most  by  that  which  yields 
him  the  most  money  for  the  least  labor,  in  the  long  if  not 
the  short  run.  If  the  agent  gets  so  much  out  of  the  premium 
as  to  break  the  company,  it  is  plain  how  that  will  cut  short 
his  profits.  If  he  gets  so  much  that  the  company  cannot  pos- 
sibly keep  its  policy-holders  satisfied,  that  will  produce  a 
similar  effect,  by  making  it  more  and  more  laborious  to  pro- 
cure applications. 

Experience  in  any  business  naturally  makes  it  grow  easier 
and  more  profitable.  But  there  are  not  many  honest  agents, 
who  have  been  long  in  the  business,  who  will  not  tell  you 
that  it  costs  more  to  secure  an  application  now  than  it  used 
to.  Among  the  reasons  for  this,  one  is  that  some  of  the  poli- 
cies are  necessarily  unsatisfactory  to  the  party  insured,  while 
the  agent  is  compensated  and  other  expenses  assessed  by  a 
fixed  percentage  on  the  premium.  Suppose  the  agent  gets 
no  more  in  the  aggregate  than  he  is  justly  entitled  to,  it  is 
still  certain  that  some  policies  have  paid  him  too  much.  And 
this  will  produce  as  bad  an  effect  as  if  others  had  not  paid 
him  too  little.  But,  in  truth,  there  is  no  policy  issued  by  the 
company  which  does  not  pay  the  agent  as  large  a  commission 
as  can  be  justified ;  as  large  as  can  be  for  his  own  profit  in 
the  long  run ;  quite  as  large,  probably,  as  he  himself  would 
be  willing  to  acknowledge  to  any  applicant.  By  urging  upon 
applicants  those  that  pay  larger  and  much  too  large  commis- 
sions, instead  of  driving  his  business  he  will  drive  himself 
out  of  his  field,  just  as  too  stunt  a  wedge  flies  from  the  log 
instead  of  splitting  it. 

Everybody  knows  that  an  agent  must  live  by  his  business, 
and  nobody  objects  to  it,  provided  the  rate  of  compensation 
is  reasonable.  The  true  test  of  what  is  reasonable  is,  that  it 
can  be  satisfactorily  explained  to  all  concerned. 

The  obvious  advantages  of  the  savings-bank  policy  which 
make  it  easier  to  work  are,  that,  without  much  enhancement  of 
the  premium  in  any  case,  and  a  diminution  of  it  in  many  cases, — 


Life  Insurance. 


165 


1.  It  stipulates  an  absolute  cash  surrender  value. 

2.  This  fact  and  the  constant  diminution  of  the  surrender 
charge  secures  the  greatest  persistence. 

3.  The  more  the  party  insures  himself,  the  less  to  an  ap- 
preciable extent,  he  pays  pro  rata  for  what  the  company 
insures  him. 

4.  It  makes  his  varying  relations  to  the  company  intelli- 
gible, from  the  first  year  of  his  policy  to  the  last. 

6.  The  terms  of  going  out  are  as  plain  as  the  terms  for 
coming  in,  so  that  there  can  never  be  any  dissatisfaction  to 
make  the  agent's  work  more  difficult. 

The  following  schedule  of  premiums  and  commissions  on 
a  policy  insuring  $1,000  entered  at  30,  will  show  the  agent 
where  the  trouble  comes  in  under  the  present  system.  Policy 
payable  at  death  or  ^ 


40 

45 

5O 

55 

6O 

65 

70 

Premium, 

$105  65 

$66  35- 

$47  45 

$36  75 

$30  25 

$26  20 

$23  75 

1st  Commiss., 

26  41 

16-59 

11  86 

9  19 

7  56 

6  55 

5  93 

Renewal, 

5  28 

3  32 

2  37 

1  84 

1  51 

1  31 

118 

-& 


Here  is  a  difference  between  the  premium  for  the  longest 
and  the  shortest  term  of  $81.90,  and  nothing  can  justify  taking 
the  latter  at  such  an  excess  of  premium  but  an  excess  of  divi- 
dend. For,  suppose  the  party  is  to  die  within  ten  years, 
clearly  his  insurance  will  have  cost  him  less  at  the  lower  pre- 
mium, and  if  he  does  not  die  the  excess  of  $81.90  compounded 
even  at  4  per  cent.,  will  amount  to  $1,022 — or  more  than  he 
would  get  on  the  high  premium — besides  which  he  would 
have  a  policy  with  a  reserve  of  $107.91.  Dividends  might 
justify  the  high  premium,  nevertheless,  but  the  commissions 
paid  to  the  agent,  not  to  speak  of  other  expenses,  make  this 
mathematically  impossible.  It  cannot  become  possible  till 
the  commissions  are  less  and  all  other  assessed  expenses  less 


1 66  Politics  and  Mysteries  of 

on  the  short-term  policy  than  on  the  longer  one — on  the  high 
premium  than  on  the  low  one.  Till  this  matter  can  be  set 
right  every  short-term  endowment  is  simply  a  bomb-shell, 
liable  to  explode  and  blow  up  the  agent  if  not  the  company. 
The  only  safe  and  permanent  business  for  the  agent  is  one 
on  which  the  policy-holder  will  be  satisfied  when  it  is  fully 
explained,  and  that  is  one  under  which  the  highest  premium 
will  pay  him  less  per  $1,000  of  policy  than  the  lowest  one. 

The  law  which  requires  the  net  value  of  every  policy  to  be 
held  in  reserve,  in  effect  divides  every  policy  into  two  series 
of  insurances, — one  done  by  the  company  which  begins  large 
and  comes  to  zero  in  the  last  year  of  the  term ;  the  other  done 
by  the  party  himself  by  his  own  deposits,  which  can  never  be 
used  for  any  claim  but  his  own,  which  begins  small  and  increases 
till  it  equals  the  face  of  the  policy  the  last  year.  When  we  keep 
these  two  series  of  insurances  distinct — the  insurance  done  by 
the  company  and  the  self-insurance — we  shall  see  why  it  is 
impossible  to  satisfy  the  short-term  policy-holder  when  we 
pay  the  same  percentage  of  his  premium  for  commission — no 
matter  what  the  premium  may  be — as  of  the  premium  for  the 
longer  term.  The  deposit  or  self-insurance  part  of  the  pre- 
mium for  the  shortest  term  above  cited,  is  $77.08,  and  of  the 
longest,  $10.98.  Either  has  got  to  accumulate  at  4  per  cent., 
so  that  if  it  is  depleted  by  much  more  than  2  per  cent.,  there 
is  no  chance  of  dividend  from  that  source,  to  say  nothing  of 
making  good  the  reserve.  So  much  for  the  self-insurance 
part  of  the  business. 

The  normal  present  value  of  all  the  insurance  the  company 
is  bound  to  do  on  the  shortest  policy  is  $36.67,  and  on  the 
longest,  $154.05.  Now,  no  matter  what  the  provision  for  ex- 
penses may  be  on  the  gross  or  actual  premiums,  the  dividends 
of  surplus  cannot  be  made  just  and  satisfactory  to  the  policy 
that  pays  the  highest  premium,  if  apart  from  2  or  2^  per 
cent,  on  his  deposit,  he  is  charged  for  other  expenses  com- 
pared with  the  other  policy  more  than  in  the  ratio  of  $36.67 


Life  Insurance. 


i67 


to  $154.05.  That  is,  he  must  not  be  made  to  pay  quite  one- 
fourth  as  much.  The  self-insurance  part  of  the  business 
in  regard  to  the  expense  it  will  bear  is  like  a  savings  bank.  It 
will  bear  as  much  expense  and  no  more.  The  insurance  part 
of  the  business  must  bear  all  the  rest  of  the  expense,  and  if 
it  is  not  assessed  in  proportion  to  the  insurance  value  of  the 
respective  policies — if  a  policy  with  a  smaller  interest  in  the 
insurance  done  by  the  company  is  made  to  pay  more  than  one 
that  has  a  larger  interest — there  will  be  the  same  row  among 
holders  when  they  come  to  understand  it,  as  there  would  be 
in  a  company  of  stockholders  assessed  without  regard  to  the 
number  of  shares  they  hold.  An  assessment  of  working  in- 
surance expenses  according  to  the  insurance  value  of  the 
policies  is  the  sine  qua  non  of  equity  in  dividends,  and  if 
equitable  dividends  are  not  to  come  in  to  make  matters  right, 
the  premiums  for  short-term  endowments  in  most  companies 
are  very  largely  too  high. 

The  savings-bank  policies  proposed  by  me  assume  a  com- 
pensation to  agents  so  high  that  it  is  necessary  to  enhance 
tfle  premiums  of  the  longest  terms,  somewhat,  in  order  to 
pay  it.  And  with  such  premiums  it  is  on  the  whole  about  as 
good  as  is  now  paid  on  such  policies.  OB.  other  policies, 
while  it  is  as  much  as  it  well  can  be,  it  is  far  less  than  is  now 
paid.  For  example,  on  a  policy  for  f  1,000  entered  at  30  for 
the  same  terms  as  above, — 


30- 

-DEATH 

OR 

40 

45 

5O 

55 

6O 

65 

70 

Premium, 
1st  Commiss'n, 

$88  23 
330 

$56  75 
3  11 

$42  03 
332 

$34  06 
370 

$29  55 
4  19 

$27  04 
472 

$25  80 
526 

1st  Renewal, 

257 

1  98 

1  81 

1  80 

1  89 

2  03 

2  18 

2d         " 

2  57 

1  98 

1  81 

1  80 

1  89 

2  03 

2  18 

3d 

2  57 

1  98 

1  81 

1  80 

1  89 

2  03 

2  18 

4th        « 

2  57 

1  98 

1  81 

1  80 

1  89 

2  03 

2  18 

5th 

2  20 

1  42 

1  05 

85 

74 

£8 

65 

1 68  Politics  and  Mysteries  of 

This  means  that  in  addition  to  2J  per  cent,  of  the  premium 
as  a  collection  fee — which  is  the  same  on  the  deposit  as  on 
the  insurance  part  of  the  premium — the  agent  receives  3  per 
cent,  of  the  initial  insurance  value  the  first  year^anj[  j^jger 
cent,  of  the  same  for  four  succeeding  years,  after  which  the 
collection-fee  is  the  only  commission. 

These  charges  will  bear  explanation  to  the  policy-holder, 
and  he  cannot  fail  to  see  that  it  is  for  his  interest  to  take  the 
shortest  policy  of  which  he  can  afford  the  premium.  By  the 
old  plan  the  self-insurance  is  made  to  increase  the  cost  of  the 
insurance ;  by  the  new  one  it  is  made  to  diminish  it,  and 
takes  away  all  motive  to  dispense  with  that  element,  as  the 
"  cooperative  "  plan  attempts  to  do. 

It  is  not  the  agents  but  the  actuaries  that  have  occasion  to 
complain  of  the  savings-bank  plan  of  insurance,  for  the  mo- 
ment the  company  adopts  it  fully,  it  leaves  no  work  which  an 
ordinary  clerk  cannot  do.  All  the  calculations  requiring  any 
actuarial  skill  having  been  made  in  advance,  the  clerks  have 
only  to  enter  the  various  values  of  the  policies,  at  the  com- 
mencement of  each  policy-year  distinctly  in  the  proper  books, 
and  the  ascertainment  of  the  company's  condition  at  the  end 
of  any  fiscal  yea^,  is  a  mere  matter  of  footing,  and  comparing 
assets  with  liabilities ;  and  actual  losses  with  expected. 

And  if  any  surplus  appears,  a  clerk  will  know  how  to  di- 
vide as  correctly  and  equitably — on  the  "  contribution  plan  ". 
— as  any  actuary  in  Christendom.  The  necessity  of  permanent 
life  actuaries  arises  from  the  fact  that  the  companies,  making 
no  analysis  of  premiums  in  advance,  find  at  the  end  of  every 
fiscal  year,  the  two  businesses  of  insurance  and  self -insurance, 
indistinguishably  mixed  up  in  their  books,  and  it  takes  more 
than  an  ordinary  clerk  to  disentangle  them. 

This  is  a  considerable  item  of  needless  expense.  But  for 
want  of  faith  that  the  work  will  be  faithfully  done  by  all  the 
companies,  the  State  steps  in — or  rather  thirty  or  forty  States 
step  in — find  compel  all  the  companies  to  transcribe  the 


Life  Insurance.  169 

of  all  their  policies  annually  for  the  State,  or  rather  for  thirty 
or  forty  States,  to  make  as  many  separate  valuations,  to  ascer- 
tain for  the  satisfaction  of  each  of  them,  the  ratio  of  assets  to 
liabilities.  And  all  this  at  the  expense  of  the  companies. 
Here  is  vastly  more  needless  expense.  For  if  the  books  were 
kept  on  the  savings-bank  plan  any  State  could  ascertain  by  a 
few  hours'  inspection  in  the  office,  whether  the  company's 
statement  was  reliable,  as  well  as  in  any  savings  bank. 

Thus  could  the  companies  well  afford  to  pay  their  agents 
better,  if  that  were  desirable.  It  is  the  agents,  after  all,  in 
my  opinion,  who  have  the  deepest  interest  in  having  the  cor- 
rect system  adopted. 

ELIZUJR  WRIGHT. 
JANUARY  20, 1873. 


Chapter  VIII. 

A  RECAPITULATION. 

The  card  on  page  .160  was  sent  in  manuscript 
simultaneously  to  a  number  of  leading  journals, 
and  among  others  to  the  "  New  York  Tribune."  The 
editor  not  having  room  to  insert  it  in  his  next  issue, 
addressed  the  writer  a  polite  note,  assuring  him  that 
it  was  received  and  would  be  inserted  soon.  After 
some  days,  and  it  did  not  appear,  the  editor,  on 
inquiry,  gave  as  a  reason  for  not  inserting  it,  a 
journalistic  rule,  that  it  could  not  appear  because  it 
had  already  appeared  in  other  journals.  A  private 
correspondence  ensued  between  the  writer  and  the 
editor  in  relation  to  this  journalistic  rule  and  its 
merits,  which  was  highly  amusing  to  at  least  one  of 
the  parties.  It  served,  certainly,  to  disabuse  the 

8 


170  Politics  and  Mysteries  of 

able  editor  of  the  idea  that  a  trick  had  been  at- 
tempted upon  his  columns,  so  that  he  went  so  far 
as  to  invite  the  writer  to  give  the  subject  a  thorough 
ventilation  therein.  This  offer  was  accepted,  and 
the  article  which  follows  was  bravely  published  in 
the  "Daily  Tribune"  Supplement  for  March  15 > 
1873,  though  not  in  the  weekly  issue.  The 
"Tribune,"  though  it  did  not  pay  for  heating  the 
poker,  is  certainly  entitled  to  great  credit  for 
displaying  it  to  the  extent  it  did. 

[From  the  Daily  Tribune  Supplement,  March  15,  1873.] 

EIGHTS  AND  WRONGS  OF  POLICY-HOLDERS. 
To  the  Editor  of  the  Tribune : — SIR, — The  existence  of  life 
insurance  in  the  country  of  its  birth  after  more  than  a  century 
of  trial,  and  its  remarkable  prevalence  in  this  country,  are 
sufficient  evidence  of  its  vitality.  .Our  country  is  specially 
proud  of  its  success  in  this  business ;  its  buildings  are  the 
marvels  of  our  cities ;  its  accomplished  work  of  endowing 
widows  and  orphans  amounts  already  to  more  than  twenty 
millions  annually,  with  a  fair  prospect  of  increase.  Yet  there 
are  some  clouds  about  it.  More  than  any  other  business, 
probably,  it  professes  equity,  and  oftener  violates  it,  and  al- 
most always  with  impunity.  It  has  always  been  covered 
with  what  bears  about  the  same  relation  to  its  essence  as 
leprosy  does  to  the  human  organism,  which  a  very  little  care- 
ful consideration  will  show. 

INSURABLE  INTEREST. 

Legitimate  insurance  of  life  is  for  the  benefit  of  the  person 
or  persons  to  whom  the  death  of  the  individual  insured  would 
otherwise  cause  a  pecuniary  loss.  Its  limit  is  an  indemnifica- 
tion of  such  loss,  and  it  has  no  business  to  go  any  further. 


Life  Insurance.  171 

The  law  of  Great  Britain  does  not  allow  a  policy  to  be  issued 
on  any  life  in  favor  of  any  person  who  has  no  "  insurable  in- 
terest "  therein,  or,  in  other  words,  nothing  to  lose  pecuniarily 
by  its  decease.  But  it  does  allow,  and  our  law  does  not  for- 
bid— and  this  is  the  fountain  of  half  the  trouble  that  has 
afflicted  life  insurance — the  policy  to  continue  in  force  after 
the  insurable  interest  has  ceased  to  exist.  After  an  insured 
person  has  become  too  old  to  labor  productively,  it  often  hap- 
pens that  he  becomes  dependent  for  support  upon  the  bene- 
ficiaries of  his  policy ;  so  that,  irrespective  of  the  claim  on  the 
policy,  his  death  would  be  a  pecuniary  gain  to  them.  The 
insurable  interest  has  not  only  ceased,  but  become  reversed. 
Yet,  strange  to  say,  neither  in  law  nor  practice  has  any  pro- 
vision ever  been  made  for  the  timely  and  equitable  cancella- 
tion of  the  policy  on  this  account.  Thousands  of  policies 
have  been,  and  continue  to  be,  surrendered  on  this  account ; 
but  the  surrender  has  never  been  regulated  on  any  rational 
or  scientific  principle.  Thus  a  policy  which  was  perfectly 
legitimate  and  exceedingly  useful  at  its  inception,  may  be 
continued  until  it  degenerates  into  a  sheer  bet,  or,  what  is 
worse,  into  a  premium  for  murder !  It  was  in  view  of  this 
abuse  of  it,  perhaps,  that  the  old  French  law  prohibited  life 
insurance  altogether. 

Our  companies  seldom  issue  policies  on  lives  over  65,  and 
never  on  one  over  75.  It  would  be  contrary  to  law  in  ordi- 
nary cases,  because  there  would  be  no  insurable  interest. 
Hence  the  proper  range  for  life  insurance  is  mainly  between 
the  ages  of  25  and  75,  and  policies  should  not  run  beyond  the 
latter  age.  The  evil  of  their  covering  the  period  of  second 
childhood  is  little  felt  yet  in  this  country  on  account  of  the 
recent  origin  of  the  business  here.  In  the  mother  country  it 
is  something  terrific. 

THE  NATURAL  PREMIUM. 

Apart  from  the  expense  of  conducting  the  business  the  cost 
of  insuring  f  1,000  for  one  year  at  a  given  age,  will  bo  as 


172  Politics  and  Mysteries  of 

"many  dollars  as  there  will  be  deaths  in  one  year  of  1,000  per- 
sons insuring  that  sum  at  that  age.  The  average  fact  is  that 
not  so  many  as  10  will  die  out  of  1,000  at  25  in  one  year,  and 
nearer  100  out  of  the  same  number  at  75,  so  that  the  premium 
to  insure  f  1,000  one  year  must  be  more  than  10  times  as  great 
at  75  as  at  25,  the  lives  being  equally  unexceptionable.  Hence, 
if  a  company  agrees  to  insure  a  person  the  same  sum,  from 
year  to  year,  from  25  to  75,  the  annual  premium  must  nat- 
urally increase  from  year  to  year  in  the  same  ratio  that  the 
vitality  diminishes.  And,  as  an  average  fact,  this  natural 
premium  will  be  exhausted  by  the  cost  of  the  insurance  at 
the  end  of  every  year,  no  reserve  being  left  or  needed.  This 
is,  on  the  face  of  it,  a  very  simple  and  nice  method  of  insur- 
ance, and  at  the  West  people  have  gone  wild  about  it,  having 
too  much  reason  for  their  madness  in  the  defects  of  the  old 
system.  But  if  the  company  engages  to  carry  on  such  insur- 
ance for  a  long  or  indefinite  term,  irrespective  of  the  health 
of  the  insured  at  the  commencement  of  each  succeeding 
year,  on  the  receipt  of  the  natural  premium  due  to  the  age, 
the  healthy  subjects,  discouraged  by  the  increase  of  the  pre- 
miums, and  having  nothing  to  forfeit  by  discontinuance,  will 
drop  out  of  the  company  and  leave  a  disproportionate  num- 
ber of  sick  ones  to  be  insured ;  so  that  the  company  must 
inevitably  fail. 

THE  ARTIFICIAL  OR  LEVEL  PREMIUM. 

The  contrivance  by  which  this  difficulty  is  obviated  is  the 
substitution  for  the  series  of  natural  increasing  premiums  of 
an  equivalent  constant  or  level  one,  regard  being  had  to  cer- 
tain assumed  rates  of  mortality  and  interest.  This,  of  course, 
must  be  so  much  more  than  enough  at  first  that  the  overplus, 
being  held  in  reserve  with  its  interest,  will  make  up  for  all 
the  deficiencies  of  the  latter  years  of  the  term. 

Two  cases  arise :  First,  of  term  insurance,  when  the  com- 
pany agrees  to  pay  the  indemnity  if  the  insured  pays  the 


Life  Insurance.  173 

premium  annually  in  advance,  and  dies  within  a  specified 
term,  but  nothing  if  he  survives  it.  Here  a  moderate  re- 
serve accumulates  during  the  first  part  of  the  term,  which  is 
wholly  exhausted  during  the  latter  part.  But  few  persons, 
however  long  the  term,  wish  to  be  left  with  nothing  but  a 
worthless  expired  policy  at  the  end  of  it,  so  that  term  insur- 
ance, on  any  terms,  is  little  sought  for. 

The  second  case  is  that  where  the  company,  in  considera- 
tion of  the  level  premium  paid  annually  in  advance,  agrees 
to  pay  the  full  sum  insured,  whether  the  person  dies  during 
the  term  or  survives  it.  This,  so  far  as  the  company  is  con- 
cerned, is  just  the  same  as  if  he  were  sure  to  die  in  the  last 
year  of  the  term,  in  which  case  the  natural  premium  (in  ad- 
vance) for  that  year  would  be  the  face  of  the  policy  dis- 
counted for  one  year.  This  is  called  the  endowment  insur- 
ance policy.  For  this  the  equivalent  level  premium,  for  a 
short  term,  is  far  greater  than  for  a  term  insurance  of  the 
same  term,  but  for  a  very  long  term  it  is  inconsiderably 
greater.  What  is  called  the  "  whole-life  policy  "  is  always 
calculated  as  an  endowment  insurance  policy,  payable  at 
death  or  100  (or,  in  New  York,  at  96).  The  net  level  annual 
premium  at  25  to  insure  $  1,000  payable  at  100  or  previous 
death,  is  $14.72,  and  for  the  same  payable  at  75  or  previous 
death,  it  is  only  $15.86,  a  difference  of  64  cents  per  annum! 
Here  is  reason  enough  why  a  "whole-life"  policy  should 
never  be  sought  for  by  a  young  man.  But  it  grieves  one  to 
say  how  carefully  this  reason  has  hitherto  been  concealed 
from  young  men. 

The  substitution  of  the  constant  or  level  premium  for  the 
natural  increasing  one  has  two  very  important  effects,  of 
which  one  is,  that  a  reserve  fund  has  to  be  created  on  every 
policy.  This  necessity  has  been  mostly  ignored  on  the  other 
side  of  the  water,  and  the  consequence  is  that  a  certain  Lord 
Westbury,  in  London,  at  this  moment,  has  in  his  hands  a 
moribund  conglomeration  of  forty  life-insurance  corporations 


174  Politics  and  Mysteries  of 

in  the  process  of  what  is  called  liquidation.  Some  years  ago, 
Mr.  Gladstone  was  so  much  worried  with  this  state  of  things 
that  he  instituted,  for  the  benefit  of  people  of  slender  means, 
Government  life  insurance  to  a  limited  amount,  through  the 
British  Post-Office.  This  is,  of  course,  exempt  from  failure, 
but  the  premiums  being  high,  no  surplus  returning  and  no 
proper  surrender  value  stipulated,  the  people  do  not  hanker 
after  it,  and  it  is  not  much  of  a  success.  If  American  life  in- 
surance has  any  superiority  over  British  as  to  stability,  it  is 
because  the  necessity  of  a  prescribed  reserve  has  been  more 
fully  recognized  here,  and  has  to  some  extent  been  enforced 
by  law. 

Another  equally  important  effect  which,  till  lately,  has  not 
been  recognized  anywhere,  is  that  it  necessarily  analyzes  the 
policy  into  two  distinct  kinds  of  insurance,  one  of  which  is 
done  by  the  company,  and  the  other  may  be  denominated 
self-insurance.  The  latter  will  be  first  considered. 

SELF-INSURANCE. 

If  the  natural  premium  to  insure  $1,000  one  year  at  a  given 
age  is  f  10,  and  instead  of  it  for  a  certain  term,  with  endow- 
ment, a  level  premium  of  f  40  is  substituted,  of  which  say 
$32  must  by  deposit  and  interest  be  in  reserve  at  the  end  of 
the  first  year,  then  the  person  paying  this  artificial  premium 
of  $40,  compared  with  one  paying  the  natural  premium  of 
$10,  is  insured  by  the  company  for  only  $968,  for  which  he 
pays  a  little  less  than  $10,  viz. :  $9.68,  and  insures  himself 
$32,  by  depositing  in  trust  with  the  company  the  rest  of  the 
$40,  which  by  the  prescribed  interest  becomes  $32  at  the  end 
of  the  year,  and  will  be  used  to  make  up  the  $968  to  $1,000 
if  he  dies,  but  can  be  used  for  no  other  death-claim,  because 
it  must  remain  with  the  company  if  he  lives.  Hence  by  the 
level  premiums  all  endowment  insurance  policies  (including 
whole  life)  necessarily  resolve  themselves  into  two  series  of 
yearly  insurances.  One,  done  by  the  company,  commencing 


Life  Insurance.  175 

with  the  face  of  the  policy  less  the  reserve  at  the  end  of  the 
first  year,  and  diminishing  to  0  in  the  last  year.  The  other, 
done  by  the  insured  himself,  beginning  with  the  reserve  at 
the  end  of  the  first  year  and  increasing  to  the  face  of  the 
policy  in  the  last  year. 

* 
INSURANCE  VALUE. 

Leaving  entirely  out  of  view  the  series  of  self-insurances, 
which  is  nothing  but  a  savings-bank  accumulation,  with  pre- 
scribed or  virtually  stipulated  annual  deposits  at  interest,  and 
regarding  only  the  decreasing  series  of  annual  insurances 
done  by  the  company,  it  is  easy  to  calculate  on  the  assumed 
rates  of  mortality  and  interest,  the  exact  sum  which,  paid  in 
advance,  will  compensate  the  company  for  carrying  this 
whole  series  of  risks,  or  be  equivalent  to  those  portions  of 
the  level  annual  premium  which  will  be  normally  from  year 
to  year  devoted  to  this  purpose,  and  this  is  the  insurance, 
value  of  the  policy — a  totally  different  thing  from  the  "  net 
value,"  or  reserve,  which  might  properly  be  called  the  self- 
insurance  value.  The  self-insurance  value,  or  reserve,  at  the 
end  of  any  policy-year,  is  simply  what  the  company's  risk  in 
that  year  lacks  of  the  face  of  the  policy. 

Now,  though  in  the  terms  and  conditions  of  the  policy 
there  is  no  express  mention  or  hint  of  all  this,  and  though  in 
conducting  the  business  for  a  century  or  two  up  to  the  pres- 
ent decade  nobody  ever  thought  of  calculating  the  insurance 
value  of  a  policy  under  that  or  any  other  name,  the  mathe- 
matical existence  and  importance  of  it  is  none  the  less  real. 
Indeed,  of  all  the  values  that  need  to  be  known  for  the  safe, 
intelligent,  and  equitable  prosecution  of  the  business  there  is 
none  more  important  than  this.  Yet,  though  the  proof  of 
this  has  been  before  the  life-insurance  world  for  full  three 
years,  and  no  expert,  in  the  British  Institute  of  Actuaries  or 
elsewhere,  has  called  it  in  question,  there  is  probably  not  a 
life-insurance  president  in  Europe  or  America  to-day  who 


176  Politics  and  Mysteries  of 

knows  what  is  the  aggregate  insurance  value  of  the  policies 
in  his  company  much  better  than  does  his  unborn  grandchild. 
Ideas,  no  matter  how  useful,  are  always  slow  in  taking 
possession  of  the  human  mind,  but  their  invasion  is,  never- 
theless, irresistible. 

It  is  only  by  knowing  the  insurance  value  of  all  the  poli- 
cies, along  with  other  things,  that  we  can  know  the  real 
strength  of  a  company.  Neither  the  number  nor  the  amount 
of  the  policies,  nor  the  magnitude  of  the  reserve,  nor  of  the 
premium  income,  nor  all  of  these  together,  can  enable  us  to 
determine  the  strength  of  the  company.  All  these  things 
have  their  significance,  and  need  to  be  known ;  but  till  we 
have  another  element  we  can  only*  guess  between  two  com- 
panies which  is  the  stronger. 

When  two  companies  are  to  be  compared  in  regard  to  the 
economy  of  their  working  expenses,  comparing  their  respec- 
tive ratios  of  expense  to  either  total  or  premium  receipts  is 
about  as  idle  as  it  would  be  to  count  the  buttons  on  the  cloth- 
ing of  their  respective  presidents.  The  only  thing  which 
approaches  a  true  test  of  relative  economy  is  the  ratio  of  the 
expenses  to  the  aggregate  insurance  value  of  the  policies. 
This  aggregate  bears  so  little  relation  either  to  the  amount 
of  the  policies,  or  the  total,  or  the  premium  receipts,  that  the 
ratio  of  expenses  to  either  of  these  can  have  no  use,  except, 
perhaps,  in  some  case  to  place  in  the  front  rank  for  economy 
a  company  which  does  not  belong  there.  The  deception 
which  has  been  practised  upon  policy-holders  and  the  public, 
wittingly  or  unwittingly,  by  the  ignorance  or  concealment  of 
insurance  value,  is  something  which  will  greatly  astound  a 
near  posterity,  and  it  might  better  be  discontinued  before  that 
posterity  arrives. 

SURRENDER  CHARGE. 

Keeping  in  mind  that  every  policy  comprises  a  series  of  in- 
surances and  a  series  of  self-insurances,  let  us  consider  how 


Life  Insurance.  177 

the  entire  contract  can  be  equitably  cancelled  prior  to  the  ex- 
piration of  its  prescribed  term,  in  case  the  insured  desires  it 
while  the  company  does  not.  If  the  self-insurance  part  stood 
alone,  disconnected  with  any  other  contract,  plainly  there 
would  be  no  more  reason  for  the  company's  refusing  to  sur- 
render the  whole  of  the  deposits  therein  with  their  accumu- 
lated net  interest,  without  charge,  than  there  would  be  for  an 
ordinary  savings  bank  doing  so.  Hence,  whatever  charge 
may  be  necessary  to  compensate  the  company  for  cancelling 
a  contract  valuable  to  it,  such  charge  can  have  no  relation 
whatever  to  the  self-insurance  part  of  the  contract.  It  is 
only  by  the  cessation  of  the  insurance  part  that  the  company 
can  possibly  lose  anything,  and  its  loss  here  will  be  in  pro- 
portion to  the  insurance  value  of  the  policy  at  the  time,  that 
is,  to  the  value  of  the  insurance  yet  to  be  done  by  it.  This 
brings  us  to  the  conclusion  that  the  surrender  charge  must  be 
such  a  percentage  of  the  insurance  value  of  the  policy  as  will 
leave  the  company  as  strong  after  the  surrender  as  it  was  be- 
fore. What  it  needs  to  be  as  a  maximum,  it  is  unnecessary  to 
inquire  here.  But  suffice  it  to  say,  it  will  not  require  to  be 
much  more  than  the  commission  or  brokerage  which  will 
procure  a  new  policy  of  equal  insurance  value,  say  six  or 
eight  per  cent,  of  the  insurance  value.  And  what  is  worthy 
of  particular  notice  is,  that  inasmuch  as  the  insurance  value 
of  a  policy,  when  limited  to  an  age  not  exceeding  75,  does 
not  increase,  the  proper  surrender  charge  for  a  given  policy 
is  greater  at  the  end  of  the  first  policy  year  than  it  can  ever 
be  afterward,  no  matter  how  much  the  reserve  may  increase. 
And  when  the  policy  is  not  limited,  but  extends  over  the  whole 
life,  the  insurance  value  increases  so  little  that  the  surrender 
charge  increases  inconsiderably.  This  is  radically  different 
from  the  customary  surrender  charge,  which  is  a  percentage 
— usually  from  25  to  50  per  cent. — of  the  self-insurance  value, 
and  of  course  increases  rapidly  with  the  age  of  the  policy. 
The  absurdity  of  this  barking  up  the  wrong  tree  for  the  sur- 
8* 


178  Politics  and  Mysteries  of 

render  charge  is  patent  enough  when,  as  often  happens,  the 
charge  becomes  larger  than  the  whole  insurance  value  of  the 
policy ;  which  means  that  it  costs  a  man  more  to  withdraw  his 
own  self-insurance  deposit  than  the  whole  value  of  the  insur- 
ance to  be  done  for  him  by  the  company,  and  from  which  he 
releases  it  by  his  departure !  The  common  rule  of  surrender, 
in  fact,  makes  entire  shipwreck  of  equity,  as  any  equity  court 
in  the  world  would  have  to  decide,  if  a  case  should  ever  reach 
it. 

The  true  cohesive  force  of  a  life-insurance  company  is  the 
surrender  charge.  If  this  is  based  on  the  reserve  which  has 
no  earthly  relation  to  it  except  being  a  security  for  its  pay- 
ment, it  must  necessarily  be  too  small  in  the  early  years  of 
the  policy,  and  monstrously  too  large  in  the  advanced  years. 
This  exorbitant  increase  of  the  charge,  which  one  seldom 
discovers  till  after  he  has  taken  his  policy,  often  induces  him 
to  drop  it  early,  whereas  if  it  had  been  the  largest  at  the  end 
of  the  first  year,  he  would  have  continued.  Where  the  charge 
amounts,  as  it  does  in  almost  all  the  present  "  all-cash  "  com- 
panies, to  a  confiscation  of  a  large  part  of  the  self-insurance 
value  without  the  slightest  regard  to  the  insurance  value,  it  is 
anything  but  a  cohesive  force.  It  is  doubtless  the  cause  of  a 
large  part  of  the  premature  discontinuance,  which  is  now 
pulling  down  the  companies  very  nearly  as  fast  as  extrava- 
gant commissions  can  build  them  up. 

ASSESSMENT  OF  EXPENSES. 

Before  any  member  of  a  mutual  life-insurance  company 
can  receive  his  share  of  surplus,  he  must  actually  or  virtually 
have  been  assessed  and  paid  his  share  of  the  working  ex- 
penses. The  mutuality  implies  that  this  share  shall  have 
been  equitably  assessed.  So  far  as  a  member  has  money  in 
trust  with  the  company,  it  is  plain  that  he  should  pay  his 
share  of  the  expense  which  this  occasions  it,  in  proportion  to 
its  amount.  But  the  reserve  fund  cannot  well  cost  the  com- 


Life  Insurance.  179 

pany  more,  except  for  collection,  than  would  the  deposits  in 
a  savings  bank.  Hence,  after  setting  aside  of  the  company's 
expenses  the  moderate  sum  which  it  costs  to  collect  and  man- 
age the  reserve— it  can  hardly  be  one  per  cent,  of  it  after  a 
year  or  two — the  residue  must  be  assessed  upon  the  members 
without  any  reference  to  the  self-insurance  on  the  policies, 
and  not  in  proportion  to  the  premiums,  which  contain  more 
or  less  self-insurance  deposit.  But  it  must  be  assessed  on 
what  measures  the  interest  which  each  policy-holder  has  in 
the  company,  considered  purely  as  an  insurance  company, 
and  this  is  nothing  else  than  the  insurance  value  of  the  pol- 
icy at  the  time.  If  there  is  any  logical  escape  from  this,  and 
money  will  buy  it,  the  companies,  none  of  which  ever  yet 
assessed  their  expenses  in  this  way,  wrill  be  in  full  possession 
of  it  within  less  than  a  year  from  this  time.  But  if  there  is 
not,  they  will  then  begin  to  change  their  practice,  to  the  great 
satisfaction  and  relief  of  the  more  self-insuring  of  their  pol- 
icy-holders, who  now  pay  the  more  toward  the  expenses  the 
more  they  insure  themselves,  and  the  less  the  company 
insures  them. 

THE  LOADING  OF  PREMIUMS. 

"  Loading  "  is  the  addition  which  is  made  to  the  "  net  pre- 
mium," to  provide  for  commissions  and  other  working  ex- 
penses, and  for  occasional  excesses  of  mortuary  loss ;  the 
"  net  premium "  being  exactly  sufficient  to  meet  the  policy 
claims,  if  there  should  be  no  expenses,  and  no  variation  from 
the  assumed  rates  of  mortality  and  interest ;  or  what  amounts 
to  the  same  thing,  if  the  death-claims  of  each  year  should  be 
exactly  what  they  would  have  been  if  the  expected  number 
of  deaths  had  happened  on  policies  of  the  average  amount. 
So  far  as  this  loading  is  to  provide  against  occasional  excess 
of  loss  from  mortality,  and  there  is  not  more  than  the  ordi- 
nary variation  of  the  amount  insured  on  one  life,  it  is  plain 
enough  that  it  should  be  proportioned  to  the  present  value  of 


180  Politics  and  Mysteries  of 

the  insurance  to  be  done  by  the  company  under  the  policy, 
that  is,  to  the  insurance  value  at  the  start.  It  should  be  pro- 
portioned to  this  rather  than  to  anything  else.  And  as  it 
has  been  already  shown  that  nearly  the  whole  of  the  working 
expenses  should-  be  assessed  on  insurance  value,  it  is  plain 
enough  that  the  provision  for  them  should  be  proportioned 
also  to  the  same  value.  And  as  when  the  policy  does  not 
extend  beyond  the  age  of  75,  the  insurance  value  does  not 
increase  but  gradually  decreases  with  the  age  of  the  policy, 
a  percentage  of  the  initial  insurance  value  which  is  sufficient 
for  the  working  expenses  at  first  will  become  more  than  suf- 
ficient afterward,  and  leave  more  and  more  of  the  margin  as 
a  safeguard  against  excess  of  mortality,  which  not  occurring 
in  any  year,  it  will  be  returned  as  surplus. 

To  illustrate  the  difference  between  the  new  plan  and  the 
old  in  regard  to  loading,  let  us  take  a  case.  By  the  Actua- 
ries' rate  of  mortality,  at  4  per  cent.,  the  net  annual  premium 
at  30  for  a  policy  of  $1,000,  payable  at  75  or  previous  death, 
is  $17.85.  Its  insurance  value  is  $171.21.  Let  us  suppose 
that  $6.85  added  to  the  net  premium  would  be  a  sufficient 
loading  for  this  policy.  This  is  4  per  cent,  of  its  insurance 
value,  and  makes  an  actual  premium  of  $24.70.  But  if  the 
same  policy  is  to  be  payable  at  40  or  previous  death,  its  net 
annual  premium  is  $84.53,  and  its  insurance  value  is  $36.67, 
4  per  cent,  of  which  is  $1.47,  making  the  actual  premium  $86. 
The  only  objection  which  can  well  be  made  against  this 
mode  of  loading,  which  leaves  the  expenses  of  the  self-insur- 
ance part  of  the  contract  to  be  wholly  defrayed  out  of  the  ex- 
cess of  the  actual  interest  over  the  low  assumed  rate,  is,  that 
a  life-insurance  company  is  at  some  expense  for  the  collec- 
tion of  deposits,  while  a  savings  bank  is  not.  This  would  be 
obviated,  if  we  provide  for  the  expense  of  collecting  these 
premiums,  which  cannot  well  exceed  2^  per  cent.,  by  adding 
l-39th  of  itself  to  each  of  them,  and  they  will  then  stand  at 
$25.33  and  $88.21  respectively.  By  the  old  plan,  which 


Life  Insurance. 

oftener  than  otherwise  loads  every  net  premium  by  25  per 
cent,  of  itself,  they  would  stand  at  $22.31  and  $105.66.  Grant- 
ing that  the  former  provision  is  sufficiently  loaded,  the  latter 
'is  overloaded  by  $18.11.  But  if  the  former  ought  to  be  loaded 
up  to  $25.33,  as  prudence  would  seem  to  dictate,  the  latter  is 
still  overloaded  by  $17.27,  which  means  that  the  party  insured 
by  this  policy  will  pay  needlessly  during  its  term,  if  he  lives 
through  it,  $172.70,  with  the  slightest  prospect  of  getting  any 
of  it  back,  because,  as  has  already  been  said,  expenses,  in- 
cluding commissions,  are  assessed  with  the  same  neglect  of 
insurance  value.  This  overloading,  and  corresponding  over- 
taxing for  expenses,  of  the  more  self-insuring  policies,  has 
brought  needless  millions  into  the  exchequers  of  the  life-in- 
surance companies,  from  this  naturally  popular  class  of  poli- 
cies. But  inasmuch  as  most  of  this  superfluous  money  has 
gone  either  into  useless  expenses,  or  into  the  pockets  of  the 
agents,  who  have  thus  received  the  largest  pay  when  they 
added  the  least  to  the  strength  of  the  company,  to  the  de- 
struction of  the  dividends  they  promised,  a  small  thunder- 
cloud is  arising  which  threatens  to  put  a  new  face  on  things 
before  we  have  clear  sky  again.  A  distinguished  life-insur- 
ance president  to  whom  this  difficulty  with  the  shorter  term 
endowment  policies  was  explained  a  few  years  ago,  admitted 
the  error,  and  that  it  was,  in  effect,  cheating  that  class  of 
policy-holders  out  of  nearly  the  whole  of  the  overloading, 
and  then  argued  against  a  correction  of  the  blunder,  that 
many  people  rather  liked  to  be  cheatecj,  and  that  if  the  life- 
insurance  companies  did  not  do  it,  somebody  else  would.  It 
will  take  only  publicity  and  a  little  time  to  test  the  soundness 
of  this  argument. 

TRUE  METHOD  OF  KEEPING  TH£  BOOKS  OF  A  LIFE-INSURANCE 

COMPANY. 

If  the  premiums  of  every  policy  issued  were  properly 
analyzed  into  self-insurance  deposit,  normal  cost  of  com- 


182  Politics  and  Mysteries  of 

pany's  risk,  and  margin  for  expenses ;  if  the  various  values, 
also,  were  pre-calculated  for  every  year  of  the  term,  and  all 
of  these  things  were  every  year  entered  distinctly,  each  under 
its  proper  head,  on  receipt  of  the  premium,  a  great  part  of 
the  expense  of  what  is  called  actuarial  labor  would  be  saved, 
since  the  books  would  then  show  by  their  footings,  at  the  end 
of  every  year,  the  liability  for  reserve,  as  well  as  all  other 
liabilities.  There  would  then  be  no  necessity  or  excuse  lor 
the  multiplied  and  expensive  State  valuations,  which  bid  fair 
to  cost  at  last  as  much  as  the  death-claims. 

The  present  method  of  keeping  the  insurance,  self-insur- 
ance, and  marginal  parts  of  the  premium  mixed  up  in  the 
books,  and  then  looking  to  some  Sisyphus  of  an  actuary  to 
separate  them  at  the  end  of  every  year,  and  ascertain  the 
liability  for  self-insurance,  and  the  relation  of  the  actual  to 
the  expected  loss,  is  very  much  as  if  the  silver  and  gold  paid 
into  the  United  States  Treasury  should  consist  wholly  of 
ingots  composed  of  the  two  metals,  mixed  in  ever-varying 
proportions,  and  should  go  on  to  the  books  in  terms  of  avoir- 
dupois, Mr:  Boutwell  having  to  employ  a  scientific  expert,  or 
a  corps  of  them,  every  year,  to  ascertain  the  value  of  each 
metal  on  hand,  by  taking  the  specific  gravity  of  each  ingot 
and  applying  the  proper  formula.  Is  such  bookkeeping  cred- 
itable to  the  last  half  of  the  nineteenth  century  ? 

SURRENDER  VALUE. 

There  is  no  more  difficulty  in  pre-calculating  a  maximum 
surrender  charge,  and  consequently  a  minimum  surrender 
value,  for  every  possible  year  of  every  desirable  policy,  than 
there  is  in  pre-calculating  the  premium.  In  fact,  that  work 
is  already  done.  No  such  value,  however,  is  ordinarily  stip- 
ulated in  the  policy,  but  it  might  be  with  perfect  safety  to  the 
company,  and  it  would  be  immensely  to  the  advantage  of 
every  honest  company  to  do  it.  This  would  secure  at  least 
three  important  objects :  1.  It  would  give  the  policy  a 


Life  Insurance.  183 

tangible  money  value,  making  it  useful  as  a  security  for  a 
loan  to  aid  in  maintaining  it  through  a  tight  place,  or  for  any 
other  purpose.  2.  It  would  make  the  officers,  in  some  meas- 
ure, like  those  of  an  ordinary  savings  bank,  more  immediate- 
ly responsible  to  individual  policy-holders,  so  that  greater 
public  confidence  would  be  secured,  and  the  necessity  for,  as 
well  as  the  labor  of,  State  supervision,  would  be  reduced 
nearly  to  zero.  Here  is  something  for  harassed  life-insur- 
ance officials  to  think  seriously  of.  3.  It  would  remove  all 
possibility  of  complaint  from  the  tongues  of  retiring  mem- 
bers, and  avoid  the  backwater  caused  by  too  many  of  them. 
Everything  being  fairly  foretold  to  and  foreknown  by  the 
policy-holder — being  inscribed  in  plain  figures  on  his  policy 
itself,  from  the  first  year  to  the  last  of  its  term — he  will  have 
only  himself  to  blame  if  he  changes  his  mind  and  retires  be- 
fore he  gets  all  the  insurance  he  agreed  to  take  and  pay  for. 
He  cannot  then,  as  now,  bitterly  say,  "  I  was  enticed  in  by 
seeing  in  the  company's  prospectus  a  paragraph  promising  to 
give  me  an  '  equitable  surrender  value '  in  case  I  should  at 
any  time  wish  to  discontinue ;  but  when  at  last  I  was  obliged 
to  do  it,  the  company  refused  to  give  me  anything  of  the  sort, 
because  it  was  not  stipulated  in  the  policy." 

Here  is  a  very  swampy  spot  in  the  business  (and  a  very 
rich  spot  for  some  of  the  companies) ,  and  the  apology  for  a 
surrender  value,  whether  in  cash,  or,  what  the  party  scarcely 
ever  wants,  "  paid-up  "  whole-life  insurance,  is  simply  ridicu- 
lous. When,  two  or  three  years  ago,  the  Auditor  of  the 
State  of  Ohio  took  it  into  his  head  to  ask  all  the  life-insurance 
companies  their  rules  about  surrender  value,  the  answers  he 
got  and  published  excited  a  broad  guffaw,  and  were  copied 
by  an  insurance  journal  under  the  head  of  "  Facetiae."  But 
they  have  been  no  laughing  matter  to  thousands  of  poor  men 
who  have  lost  from  $50  to  $500  beyond  any  righteous  surren- 
der charge. 


184  Politics  and  Mysteries  of 

DIVIDENDS  ON  THE  CONTRIBUTION  PLAN. 
This  plan  of  distributing  the  surplus  of  a  mutual  life-insur- 
ance company  is  per  se  founded  on  obvious  equity,  and  theo- 
retically it  has  carried  the  day.  But  it  does  not  decide  the 
previous  question  of  the  mode  of  assessing  the  expenses,  and 
when  prefaced  by  the  false  method  above  exposed,  of  assess- 
ing expenses  in  proportion  to  premiums,  it  becomes  prac- 
tically either  a  farce  or  an  impossibility.  This  trouble  was 
evaded  in  the  company  where  the  "  contribution  plan "  was 
first  practised,  because  the  excessive  surrender  charges  in 
that  company  (it  being  an  "  all-cash  "  company)  were  more 
than  equal  to  the  working  expenses,  so  that  that  burden  was 
thrown  wholly  on  retiring  members.  But  if  the  policies  stip- 
ulate a  righteous  surrender  value,  the  retiring  members  will 
leave  nothing  in  the  company  which  can  properly  be  applied 
to  defray  the  working  expenses  of  the  year  in  which  they  re- 
tire. What  they  do  leave  must  either  be  held  as  additional 
reserve  against  the  impairment  of  the  average  vitality,  or  it 
must  be  expended  in  the  future  years  to  repair  that  average 
by  the  procurement  of  new  insurance  value  of  higher  vitality. 
Companies  cannot  expect  much  longer  to  throw  the  whole  of 
their  expenses  on  the  retiring  members.  Most  of  them  re- 
tire too  early,  and  the  old  members  are  consulting  equity  law- 
yers about  their  rights  under  certain  promises  of  the  com- 
panies outside  of  the  policies.  Hence  if  the  "  contribution 
plan  "  is  not  to  be  thrown  to  the  dogs,  there  seems  a  necessity 
of  assessing  expenses  on  insurance  value.  If  this  is  done, 
and  the  books  are  kept  and  policies  written  as  above  de- 
scribed, "  contribution  dividends "  will  work  admirably,  and 
be  intelligible  to  everybody. 

THE  TRUE  REMEDY. 

It  is  in  vain  to  look  to  legislatures  to  correct  the  errors  of 
life  insurance.  Legislatures  cannot  impair  the  .obligations  of 
existing  contracts.  As  to  future  policy-holders,  unconscious 


Life  Insurance.  185 

of  their  own  existence  as  such,  they  are  not  likely  to  appear 
in  person,  or  by  counsel,  before  any  legislature.  The  insur- 
ance corporations  themselves,  if  they  appear,  are  not  likely 
to  ask  the  legislature  to  tie  up  in  any  way  their  hundreds  of 
hands.  They  are  more  likely  to  ask  just  the  reverse.  There 
is  a  funny  story  about  a  life-insurance  president  who  spent 
several  thousands  of  the  company's  money  at  a  State  capital, 
and  had  the  amount  carried  on  its  books  to  the  dividend  ac- 
count, where,  of  course,  it  appeared  creditably  if  not  logically. 
The  only  hope  of  having  business-like  business  in  life  insur- 
ance, lies  in  enlightening  the  public  mind,  through  the  press 
and  the  lecture-room,  up  to  the  point  of  making  all  applicants 
for  insurance  insist  upon  being  dealt  with  intelligibly  and 
reasonably,  or  not  at  all. 

EUZUR  WRIGHT. 
BOSTON,  March  6, 1873. 


Chapter  IX. 

PKEMIUM  NOTES,  LIENS,  DIVIDENDS  AND  TONTINE 

POLICIES. 

It  would  be  easy,  for  one  possessing  the  gift,  to 
write  a  highly  comic  chapter  on  the  various  schemes 
adopted  by  the  companies  to  attract  business  and 
get  ahead  of  each  other.  The  States  vied  with 
each  other  in  making  these  corporations,  and  in 
some  they  were  hatched  by  general  statute,  like 
chickens  in  an  oven.  Of  course  they  must  live,  - 
at  least  long  enough  to  die.  Hence  a  struggle. 
We  have  seen  how  the  business,  a  mixture  of  in- 
surance and  accumulation,  in  all  possible  and  ever 
variable  proportions,  was  as  incomprehensible  to 


1 86  Politics  and  Mysteries  of 

the  simple  customer  as  a  marketman's  sausages, 
or  a  boarding-house  keeper's  hash.  All  the  more 
for  this  reason  was  it  susceptible  of  no  end  of 
tricks,  dodges,  variations,  short  cuts  and  mirages. 
w  Plans,"  figure-heads  and  prophecies  were  the  main 
dependence,  and  for  a  while  they  seemed  to  be 
conducting  every  chicken  of  a  company  to  wealth, 
power  and  glory.  What  was  paid  for  these  inven- 
tions, in  some  instances,  is  quite  incredible  except 
on  the  hypothesis  that  the  directors  were  vegetables 
of  uncommon  verdure.  More  than  once  some  cute 
chap  has  prevailed  on  a  board  of  directors  to  allow 
him  a  lucrative  commission  on  all  the  premiums  re- 
ceived under  a  certain  novel  "plan,"  of  no  value 
whatever  either  to  the  policy-holder  or  the  company, 
but  a  decided  detriment  to  the  simplicity  of  the  ac- 
counts. One  of  them  even  had  the  tact  to  get  such 
a  commission  commuted  into  an  annuity  on  his  life, 
worth  not  less  than  $15,000,  on  the  supposition 
that  his  days  will  not  be  shortened  by  the  brilliancy 
of  his  inventive  faculties.  Figure-heads,  of  course 
mostly  wooden,  have  cost  all  the  way  from  $5,000 
to  $20,000  a  year.  One,  somewhat  damaged  by 
the  late  war,  was  obtained  by  a  southern  company, 
as  it  is  said,  for  $10,000  a  year,  probably  the  best 
bargain  of  that  sort  that  can  be  quoted.  As  a  gen- 
eral fact  these  speculations  have  not  paid.  Board- 
ers who  would  have  been  well  satisfied  with  meat 
and  potatoea  mixed  in  the  standard  dish,  could  they 


Life  Insurance.  187 

have  known  what  they  were  and  in  what  propor- 
tions, have  become  disgusted  with  the  arts  of  cook- 
ery which  made  them  believe  in  something  else. 
They  have  left  and  are  leaving  at  such  a  rate  as  to 
discourage  the  most  enterprising  landladies. 

It  was  demonstrated  long  ago,  both  by  figures 
and  facts,  that  if  the  premiums  are  not  more  than 
sufficient,  and  the  reserve  is  not  calculated  at  a  rate 
of  interest  considerably  below  that  which  may  be 
expected,  a  life-insurance  company,  unless  it  has  a 
large  capital  to  carry  it  over  the  fluctuations  of 
mortality,  is  a  very  unsure  thing.  The  purely  mutual 
companies  have  no  capital  at  all,  and  the  mixed 
ones  but  little.  They  can  rely  only  on  a  full  re- 
serve at  a  low  interest.  In  a  bad  year,  when  the 
death-claims  are  larger  than  were  expected,  they 
have  two  resources  :  1.  The  excess  of  the  margins 
of  the  premiums  of  the  year  over  the  office  ex- 
penses. 2.  The  excess  of  interest  on  their  invest- 
ments over  the  rate  on  which  the  reserve  is  calcu- 
lated. In  a  well-established  company  this  last 
resource  is  a  very  effective  one,  and  will  provide 
for  nearly  double  the  average  claims.  By  the  same 
token,  in  average  years,  unless  the  expenses  have 
been  scandalously  extravagant,  there  will  be  a  con- 
siderable surplus  of  income  beyond  what  is  neces- 
sary to  meet  the  claims  and  maintain  the  reserve. 

No  one  who  has  examined  the  foregoing  tables 
will  have  failed  to  perceive  that  the  company, 


1 88  Politics  and  Mysteries  of 

whether  it  is  to  have  a  surplus  to  divide  or  not,  can 
safely  take  a  part  of  the  premium  in  the  note  of  the 
insured.  All  the  cash  it  needs,  on  the  self-insurance 
part  of  the  contract,  is  what  it  will  charge  in  case 
(of  surrender.  It  can  take  notes  up  to  the  surren- 
(der  value  at  the  end  of  any  year.  The  insured 
must  pay  interest  on  these,  at  least  as  high  as  the 
rate  at  which  the  reserve  increases.  But  who 
wants  to  endow  his  orphans  or  himself  with  his  own 
notes  ?  Who  can  suppose  it  profitable  to  borrow 
money  to  deposit  in  a  savings  bank,  especially  if 
he  pays  more  interest  for  it  than  the  said  bank  re- 
turns ?  If  a  man  can  accumulate  somewhere  else 
faster  than  in  the  life-insurance  company's  savings 
bank,  it  may  be  wise  for  him  to  pay  premium  notes 
and  use  the  life-insurance  company  only  for  insur- 
ance. But  this  is  not  the  usual  case.  The  pre- 
mium would  seldom  be  paid  to  any  extent  by  note, 
and  never  on  short-term  endowments,  if  the  party 
was  not  made  to  believe  that  the  dividends  of  sur- 
plus would  cancel  the  notes,  and  thus  .leave  the 
insurance  or  endowment  at  its  full  face.  To  estab- 
lish anything  like  a  probability  of  all  the  notes 
being  cancelled,  if  the  policy  should  survive  its 
term,  they  must  be  far  smaller  than  the  rule  in  any 
note-company,  and  should  not  be  taken  at  all  on 
the  first  year  of  the  policy.  That  50,  40  or  even 
30  per  cent,  notes  would  be  entirely  or  nearly  can- 
celled by  dividends  was  always  a  lie,  wherever  it 


Life  Insurance.  189 

was  asserted.  A  company  taking  all  its  premiums 
in  cash  and  refusing  to  pay  an  equitable  surrender 
value,  thus  getting  its  expenses  and  perhaps  more 
out  of  its  retiring  members,  could  undoubtedly  make 
a  dividend  sufficient  to  extinguish  30  or  perhaps  40 
per  cent,  notes,  if  they  existed  in  it.  But  if  they 
did  exist  in  it,  as  a  general  rule,  the  retiring  mem- 
bers would  not  have  been  deprived  of  their  money 
for  the  benefit  of  the  persisting  ones.  In  fact,  the 
reverse  would  have  been  the  case  with  those  who 
retired  early.  They  would  have  got  their  insur- 
ance too  cheap. 

What  is  true  enough  about  premium  notes  is 
that,  unless  the  expenses  are  much  too  high,  the 
premium  notes  usually  taken  may  be  so  much  re- 
duced as  to  be  after  the  first  year  or  two  within  the 
reserve,  so  as  to  be  the  safest  asset  the  company 
can  have.  This,  however,  has  been  abundantly 
denied  by  the  agents  of  the  all-cash  companies,  who 
never  tire  of  asserting  the  entire  hollowness  and 
rottenness  of  companies  whose  premium-note  assets 
approached  the  aggregate  equitable  surrender  value 
of  their  policies.  To  a  cynical  mind  it  would  be 
an  interesting  inquiry  whether  or  not  the  lies  told 
against  the  stability  of  the  note  companies  exceed 
in  number  those  told  about  the  dividends  cancel- 
ling the  notes.  They  must  number  by  millions  on 
both  sides.  If  the  author  of  lies  cannot  be  bound 
for  a  thousand  years,  the  next  best  thing  is  to  sim- 


190  Politics  and  Mysteries  of 

plify  the  business  so  that  lying  will  have  no  reward 
[  except  what  it  can  get  in  another  world. 

It  is  hardly  necessary  to  speak  of  that  variety  of 
premium  note  called  a  "lien."  In  this  case  the 
first  premium  is  much  larger  than  any  succeeding 
one,  and  the  excess  over  the  level  premiums  that 
succeed,  is  a  note,  payable  only  as  an  offset  or  lien 
on  the  claim.  It  diminishes  the  insurance  just  so 
much,  that  is,  in  regard  to  the  face  of  the  policy, 
it  is  so  much  self-insurance.  But  holding  the  com- 
pany bound  for  the*  face  policy,  the  lien  must  of 
course  be  admitted  as  an  asset.  And  as  it  is  two 
or  three  times  the  net  value  of  the  policy,  consid- 
ered as  an  ordinary  level  premium  policy,  if  the 
Superintendent  or  Commissioner  of  Insurance  will 
be  good  enough  to  admit  it  as  an  asset,  and  at  the 
same  time  value  the  company's  liability  on  the 
policy  as  if  it  had  received  only  the  level  net  annual 
premium,  the  company  may  have  spent  the  whole 
of  the  cash  received  on  that  policy  and  another,  and 
still  appear  to  have  a  full  reserve.  Supposing  that 
the  gross  valuation,  or  discounting  future  margins 
into  assets,  by  which  the  British  life  insurance  com- 
panies have  made  their  descent  to  Avernus  so  facile, 
is  a  valuable  thing,  any  board  of  directors  bent 
upon  visiting  that  shady  place,  might  afford  to  pay 
something  for  this  little  bit  of  the  same  sort  of 
stuff.  The  invention  is  ingenious,  but  its  sole 
utility  in  this  country  is  to  circumvent  the  State 


Life  Insurance.  191 

Cerberuses.  Companies  that  wish  to  do  nothing  of 
the  sort,  have  thrown  it  aside,  if  they  ever  adopted 
it. 

f""  The  various  modes  of  applying  dividend,  or  get- 
ting rid  of  surplus  in  mutual  companies  have 
already  been  noticed,  pages  18  and  19.  At  the 
period  there  referred  to,  shares  of  surplus  were 
assigned  in  proportion  to  premiums  paid,  without 
regard  to  the  reserve  on  the  policy.  Two  policies 
paying  the  same  premium  would  receive  the  same 
dividend,  and  it  might  be  fifty  per  cent.,  but  pay- 
able four  or  five  years  after,  should  the  policy  be 
then  in  force.  Yet  it  might  happen  that  one  of 
these  policies  had  by  its  larger  reserve  produced 
twice  as  much  surplus  as  the  other.  As  the  com- 
panies grew  older,  and  a  large  surplus  arose  from 
the  excess  of  the  actual  over  the  normal  interest  of 
the  reserve,  the  percentage  dividend  became  almost 
comically  inequitable,  though  too  serious  for  a  joke 
to  the  early  members,  or  holders  of  policies  with 
small  premiums  and  large  reserves. 

To  Mr.  Sheppard  Homans,  Actuary  of  the  Mu-  ' 
tual  Life  Insurance  Company  of  New  York,  and 
Mr.  D.  P.  Fackler,  his  assistant,  belongs  the 
honor  of  devising  an  equitable  mode  of  dividing 
surplus,  which  they  called  the  "  Contribution  Plan," 
because  it  simply  returns  to  each  policy-holder 
what  his  own  policy  has  contributed  to  produce  the 
surplus,  either  from  over-payment  on  the  insurance 


1 92  Politics  and  Mysteries  of 

part  of  the  contract  or  extra  interest  on  the  self- 
insurance  part.  This  plan  was  adopted  by  the 
Mutual  Life  without  delay,  and  the  results  were 
very  satisfactory  to  the  policy-holders,  the  more  so 
that  the  expenses  had  been  defrayed  by  the  surren- 
der charges  on  retiring  members  and  the  forfeiture 
of  lapsed  policies.  It  soon  attracted  great  atten- 
tion and  discussion.  Hon.  John  E.  Sanford,  In- 
surance Commissioner  of  Massachusetts  in  1867, 
addressed  a  circular  to  a  large  number  of  actuaries 
and  mathematical  men,  soliciting  their  opinions  as 
to  the  best  mode  of  distributing  surplus  in  a  Mutual 
Life  Insurance  Company.  The  replies  which  he 
received  were  published  in  full  in  his  Thirteenth 
Annual  Report,  and  are  very  various,  but  a  large 
number  of  them  approve  substantially  of  the  con- 
tribution plan.  Prof.  William  H.  C.  Bartlett,  of 
West  Point,  in  his  reply,  uses  the  following  very 
decisive  language.  "I  find  that  this  question  has 
been  solved  by  Mr.  Sheppard  Homans,  Actuary 
of  the  Mutual  Life  Insurance  Company  of  New 
York,  in  a  way  which  leaves  nothing  to  be  desired. 
His  solution  is  simple,  direct  and  accurate,  and 
I  commend  it  to  your  considerate  attention." 
After  suggesting  some  verbal  criticisms,  he  pro- 
ceeds :  "Mr.  Homans'  solution  of  this  most  impor- 
tant problem,  returns  to  each  member  of  his^com- 
pany  not  only  what  he  may  have  overpaid,  but  also 
what  the  overpayments  may  have  earned  while  in 


Life  Insurance.  193 

the  possession  of  the  company  and  under  its  con- 
trol. He  gives  back  the  ' talents'  committed  to 
the  custody  of  the  company,  with  their  legitimate 
gains ;  and  thus,  in  my  opinion,  repairs,  in  the 
only  way  they  can  be  repaired,  the  wrongs  con- 
stantly but  unavoidably  committed  upon  individual 
interests,  in  the  endeavors  to  keep  upon  the  safe 
side  of  the  contingencies  inseparable  £*om  the  busi- 
ness of  life  assurance."  This  was  dated  March  8, 
1868.  It  was  just  as  easy  then  as  afterwards  to  see 
that  Mr.  Homans'  formula  took  no  cognizance  of 
the  fact  that  the  year  of  the  policy  from  one  pay- 
ment of  premium  to  another  seldom  coincides  with 
the  fiscal  year  of  the  company,  and  that  his  expres- 
sion for  the  actual  cost  of  the  year's  insurance  was 
rather  vague,  requiring  a  special  interpretation  to 
,ke  it  give  correct  results.  But  there  is  no  use 
n  putting  too  fine  a  point  upon  anything.  In  a 
company  as  large  and  well  established  as  the  Mutual 
Life  then  was,  there  was  no  appreciable  chance  of 
any  harm  coming  to  it  from  assuming,  as  Mr.  Ho- 
mans' formula  does,  that  all  the  policy-years  are 
coincident  with  the  fiscal  year ;  or,  in  other  words, 
that  no  part  of  the  apparent  surplus  at  the  end  of 
the  fiscal  year  consists  of  unearned  margins,  if  the 
share  of  surplus  thus  determined  is  not  paid  till  the 
next  settlement  of  premium,  as  was  the  fact  in  the 
Mutual  Life.  In  a  newer  and  smaller  company,  of 
course  it  would  be  better  to  apply  the  formula  only 

9 


194  Politics  and  Mysteries^of 

to  the  policy-years  ending  within  the  fiscal  year,  and 
not  return  the  resulting  contributions  of  surplus 
till  the  next  settlement  of  premium  or  the  next  but 
one.  But  in  such  a  company  as  the  Mutual  Life, 
with  so  large  an  interest  account,  and  so  little 
chance  of  fluctuation  in  the  death-claims,  if  there 
are  two  policies,  A  and  B,  alike  in  all  respects  ex- 
cept that  A's  policy-year  was  coincident  with  the 
fiscal  year,  and  B's  only  just  began  as  the  fiscal 
year  closed, — that  is,  A's  premium  is  just  due  and 
B's  just  paid, — you  may  assume  almost  infallibly, 
that  B  will  contribute  to  surplus  by  the  time  his 
next  premium  becomes  due,  as  much  as  A  is  found 
to  have  contributed  already.  If  this  assumption 
does  not  turn  out  strictly  correct,  on  account  of  the 
rate  of  contribution  falling  off  in  the  next  fiscal 
year,  the  succeeding  dividend  will  be  smaller,  ancL| 
taking  one  year  with  another  all  will  be  served 
alike. 

The  propriety  of  this  view  has  been  so  well  tested 
in  the  late  experience  of  the  Mutual  Life,  that  that 
experience  is  worth  dwelling  upon,  though  it  may 
involve  some  disagreeable  personalities.  If  princi- 
ples and  facts  are  to  be  discussed,  the  persons  who 
make  themselves  representatives  of  the  principles 
and  responsible  for  the  facts  cannot  always  be  left 
unmentioned,  if  we  would. 

In  1869,  Mr.  Winston,  president  of  the  Mutual 
Life,  and  Mr.  Sheppard  Romans,  the  actuary,  be- 


Life  Insurance.  195 

came  dissatisfied  with  each  other,  for  reasons  which 
the  reader  will  be  allowed  by  and  by  to  gather  for 
himself  from  their  own  statements.     Mr.  Winston 
then  applied  to  Professors  Bartlett  and  Church,  of 
West  Point,  for  a  searching  criticism  of  Mr.  Ho- 
mans'  method  of  dividing  surplus,  and  those  gentle- 
men then  discovered,  what  had  been  patent  enough 
to  every  mathematician  practically  connected  with 
the  business,  that  his  formula  was  applicable  only 
on  the  assumptions  above  stated.      They  devised 
and  constructed  new  and  very  elaborate  formulas, 
on  the  principle  of  the  "accumulation   formula," 
covering  the.  whole  history  of  the  policy  from  the 
start,  and  reconstructing  it,  whatever  its  date,  into 
policy  years  coincident  with  the  company's  fiscal 
years.     Such  algebra  is  as  easy  as  travelling  by 
balloon.     The  only  difficulty  is,  when  you  come 
down  to  the  solid  ground  of  the  facts,  it  may  take 
a  great  deal  longer  to  establish  a  satisfactory  con- 
nection with  them  than  it  did  to  make  the  journey. 
Mr.  Winston  then  procured  from  the  company's  . 
counsel  a  legal  opinion  that  the  company's  charter 
required  the  dividend  to  be  restricted  to  the  surplus 
definitively  developed  at  the  end  of  each  fiscal  year. 
It  could  not  proceed  on  any  assumption  as  to  the 
surplus  to  be  expected  in  the  unexpired  fractions 
of  policy  years  equalling  that  of  the  expired  frac- 
tions included  in  the  last  fiscal  year.     This  done, 
Mr.  Homans  was  ordered  to  apply  the  formulas  of 


196  Politics  and  Mysteries  of 

Professors  Bartlett  and  Church  to  the  policies  out- 
standing on  the  31st  of  December,  1869,  so  as  to 
divide  the  surplus  actually  and  definitively  then  de- 
veloped, since  the  last  settlement  of  premiums,  and 
no  more, — for  the  critics  of  Mr.  Romans  were  of 
opinion  that  each  policy  had  received  its  full  share 
of  surplus  up  to  that  time,  if  not  more.  Mr.  Ho- 
mans  at  once  protested  against  this  on  various 
grounds,  among  others  that  the  formulas  were  so 
complicated,  and  involved  so  many  quantities  not 
tabulated,  that  the  work  of  making  the  dividend 
would  consume  many  months,  if  not  years.  The 
dispute  between  Mr.  Romans  and  the  West  Point 
professors,  which  had  grown  to  be  voluminous,  was 
then  referred  by  the  Mutual  Life  trustees  to  J.  P. 
Bradley,  Esq.,  since  Judge  of  the  United  States 
Supreme  Court,  Professor  Newton  of  Yale  College, 
and  the  writer,  all  of  whom  had  had  some  practical 
experience  in  making  life-insurance  dividends.  The 
referees  had  a  very  delicate  duty  before  them.  They 
.  were  unanimously  of  opinion  that  while  the  West 
Point  formulas  were  mathematically  correct,*their 
application  must  throw  away  a  great  deal  of  labor ; 
that  the  interpretation  given  to  the  charter  by  the 
counsel  did  not  secure  any  better  equity  of  distribu- 
tion, while  the  change  it  involved  would  entail  a 
present  derangement  and  needless  future  expense. 
They  recommended,  therefore,  that  the  charter 
should  be  changed  as  soon  as  possible,  and  in  the 

*  Substantially  so.    They  were  not  free  from  errors. 


Life  Insurance. 


197 


meantime,  being  bound  by  the  opinion  of  counsel, 
they  suggested  the  best  formula  they  could — that  of 
Mr.  Homans  slightly  modified,  and  more  fully  inter- 
preted— for  finding  the  contribution  to  surplus  of 
each  outstanding  policy  for  the  fraction  of  a  policy- 
year  from  its  last  anniversary  up  to  December  31st, 
1869,  and  also  another  complementary  formula,  in 
case  the  charter  should  not  be  altered,  to  be  used 
at  the  next  calculation  of  dividend  to  find  the  con- 
tribution to  surplus  from  December  31st,  1869,  of 
each  policy  up  to  its  anniversary  in  1870,  the  con- 
tribution from  that  anniversary  up  to  December 
31st,  1870,  being  to  be  found  by  the  formula  used 
for  the  previous  fiscal  year, — or  rather  eleven 
months,  on  account  of  the  change  of  dividend  day 
from  February  1  to  January  1.  Mr.  Homans,  using 
the  formula  above  referred  to,  ascertained  the  sum- 
total  of  the  contributions  to  surplus  up  to  Decem- 
ber 31st,  1869,  to  be  $1,091,900.28,  while  the 
whole  apparent  surplus,  including  "unearned  mar- 
gins "  so  called,  was  $2,2395387.39.  This  showed 
pretty  clearly  that  the  method  of  division  he  had 
previously  pursued  was  not  very  dangerous.  But 
as  there  was  no  question  that  undej  his  former  dis- 
tributions each  policy  had  received  its  full  share  of 
surplus  up  to  its  latest  anniversary,  under  the  de- 
cision of  the  referees — limited  as  it  was  practically 
and  rigidly  by  the  opinion  of  counsel,— the  $1,091,- 
900.28  was  all  that  could  be  divided  on  the  1st  of 


198  Politics  and  Mysteries  of 

January,  1870,  payable  at  the  next  settlement  of 
.premium  in  each  case.  The  balance  of  $1,147,- 
489.11  did  not  contain  any  surplus  from  extrane- 
ous sources,  such  as  profits  of  forfeiture,  for 
in  that  eleven  months  the  company  had  not  made 
enough  out  of  retiring  members  to  quite  pay  ex- 
penses, and  Mr.  Homans  assessed  45  per  cent,  on 
the  margins  of  the  fractional  policy  years,  counting 
as  surplus  but  55  per.  cent.  Hence  under  the  rule 
established  by  the  learned  counsel,  at  the  invoca- 
tion of  Mr.  Winston,  the  propriety  of  which  was 
not  submitted  to  the  referees,  not  a  dollar  of  this 
$1,147,489.11  could  be  touched  till  the  next  divi- 
dend day,  January  1,  1871,  came  round.  But  as  not 
only  Mr.  Homans  but  the  referees  had  expressed 
the  opinion  that  there  was  no  hazard  in  dividing  it 
— payable  with  the  next  premium — Mr.  Winston 
concluded,  in  spite  of  his  legal  counsel,  not  to  dis- 
gust his  policy-holders,  after  all,  by  the  blunder  of 
so  small  a  dividend,  keeping  on  hand  an  unneces- 
sary million  for  a  year*!  So  without  asking  either 
Mr.  Homans  or  any  of  the  referees,  or  even  Pro- 
fessor Bartlett  or  Church,  how  this  $1,147,489.11, 
or  any  part  of  it,  should  be  divided,  any  one  of 
whom,  if  asked,  would  have  prevented  him  from 
making  the  most  comical  blunder  in  the  annals  of 
finance,  he  and  his  committee  voted  that  each  con- 
tribution or  share  of  dividend  ascertained  by  Mr. 
Homans,  should  be  increased  80  per  cent !  This, 


Life  Insurance. 


199 


of  course,  made  the  whole  dividend  for  the  eleven 
months  $1,965,420.50.  It  was  in  vain  that  Mr. 
Homans  protested  against  the  vote  as  absurd  and 
contrary  to  the  decision  of  the  referees  under  the 
rule  of  counsel.  He  had  nothing  to  do  but  to 
assign  the  shares,  according  to  the  vote  of  the  com- 
mittee. And  the  resulting  joke  may  be  thus  illus- 
trated :  A  and  B  are  two  policies,  alike  in  all 
respects  except  that  A  had  its  anniversary  February 
1,  1869,  and  B,  December  31,  1869.  Suppose,  as 
might  have  been  the  exact  fact,  that  A's  contribu- 
tion at  the  end  -of  the  latter  day  was  $81.69,  and 
B's  $0.24.  The  vote  of  Mr.  Winston  and  his  com- 
mittee gave  A  a  dividend  payable  February  1,  1870, 
of  $147.04,  and  B  one  of  FORTY-THREE  CENTS,  pay- 
able December  31,  1870.  The  faculty  of  putting 
things  wrong  end  foremost  could  not  go  much  fur- 
ther than  this.  A  policy  dated  the  15th  of  June 
was  the  only  one  which  would  get  what  belonged  to 
it.  Those  that  came  after  were  all  to  be  robbed 
more  and  more  to  gladden  the  hearts  of  those  hav- 
ing earlier  dates.  Probably  this  blunder  has  been 
fully  corrected,  and  though  it  must  have  cost  some- 
body a  good  deal  of  worry  to  do  it,  the  fun  of  it, 
to  say  nothing  of  its  lesson,  is  worth  a  good  deal. 
Poor  plodding  actuaries  have  a  dull  time  of  it,  and 
an  occasional  joke  of  this  sort  does  them  good.  It 
is  almost  needless  to  say  that  after  this  experience, 
the  Mutual  Life  has  returned  to  the  first  simple  sys- 


200  Politics  and  Mysteries  of 

tern  of  Mr.  Homans,  of  rating  annually  the  contri- 
butions of  the  entire  current  policy-years  of  out- 
standing policies  however  dated,  by  the  experience 
of  the  fiscal  year  just  concluded. 

After  thus  having  narrated  as  clearly  as  the  na- 
ture of  the  case  would  admit,  the  facts  of  this  re- 
markable escapade,  it  is  due  to  the  reader  to  furnish 
him  the  means  of  ascertaining  its  cause. 

The  "Spectator,"  of  New  York,  of  July,  1873, 
contains  an  article  headed  "PRESIDENT  WINSTON 
INTERVIEWED/'  which  cannot  be  supposed  to  have 
been  published  without  his  full  consent.  This  is 
an  extract : — 

"  What  were  the  causes  of  Mr.  (Actuary)  Homans'  retire- 
ment from  the  Mutual  Life  ? 

"  In  brief,  unfaithfulness,  incompetency,  obstinacy,  imprac- 
ticability and  insubordination,  in  my  opinion,  were  the  reasons 
why  the  board  rid  themselves  of  him. 

"  Is  it  true,  as  he  charges,  that  when  the  dividend  system 
was  changed  in  1869,  f  2,000,000  had  to  be  appropriated  to 
correct  a  mistake  that  you  made,  in  spite  of  his  protest  ? 

"  It  is  not.  I  do  not  know  how  I  can  better  explain  this 
matter  than  by  reading  you  a  letter  I  addressed  to  a  com- 
mittee of  the  board  which  was  raised  in  the  year  1870  to  con- 
sider certain  alleged  improprieties  on  the  part  of  Mr.  Ho- 
mans. I  then  wrote : — 

"Inasmuch  as  Mr.  Homans,  in  one  of  his  letters  to  me 
(which  I  have  handed  over  to  you) ,  refers  to  the  present 
mode  of  dividing  surplus,  I  think  it  well  to  remark  that  the 
original  cause  of  all  this  trouble  and  discussion  about  the 
addition  of  eighty  per  cent,  to  the  last  dividends  ascertained 


Life  Insurance.  201 

by  Mr.  Homans  was  a  mistake  which  he  made  in  reporting 
the  amount  of  divisible  surplus  to  the  board  last  year.  Under 
the  former  system  of  anniversary  dividends  running  with  the 
policy  year,  the  margins  were  all  earned  before  the  dividends 
were  paid.  Hence  in  estimating  surplus  as  of  a  given  date, 
payment  in  the  individual  cases  being  postponed  as  above, 
no  such  reserve  was  necessary.  But  when  it  was  found  nec- 
essary to  ascertain  the  surplus  actually  earned  on  past  busi- 
ness upon  a  given  day,  and  to  divide  that  amount  and  that 
only,  Mr.  Homans  probably  forgot  the  unearned  margins  in 
premiums  accruing  from  that  day  to  the  respective  anniver- 
saries of  the  policies,  and  failed  to  include,  as  he  should  have 
done,  a  reserve  for  these  among  the  liabilities  of  the  company 
on  that  day.  Mr.  Homans  at  that  time  either  did  not  compre- 
hend or  was  afraid  to  admit  the  nature  of 'his  mistake,  and 
the  committee,  considering  his  official  statement  and  most 
positive  assurance  that  a  surplus  existed  (all  of  which,  to  use 
Mr.  Homans'  own  phraseology,  might  have  been  thrown  into 
the  dock  and  the  company  remain  solvent),  could  not  see 
why  it  was  not  divisible.  Had  Mr.  Homans  known,  and 
frankly  explained  his  mistake  to  the  committee,  a  remedy 
would  have  been  sought,  and  much  of  the  trouble  of  the  past 
year  would  have  been  avoided.  But  his  first  error  was  in- 
creased by  a  disingenuous  attempt  to  cover  it  up ;  and  the 
committee,  unable  to  follow  the  tortuous  windings  of  his 
elaborate  attempts  at  mystification,  were  compelled  to  take 
that  course  which  in  their  judgment  the  interests  of  the  pol- 
icy-holders imperatively  demanded,  leaving  a  rectification,  if 
any  should  be  necessary,  to  a  future  time.  In  his  intercourse 
with  the  committee,  Mr.  Homans  manifests  neither  candor 
nor  capacity  as  an  adviser,  while  his  memory  in  matters 
affecting  his  personal  or  professional  interests  is  strangely 
unreliable. 

"  In  accordance  with  the  avowed  intention  at  the  time,  Mr. 
Homans'  mistake  was  subsequently  rectified,  so  that  each 
9* 


202  Politics  and  Mysteries  of 

policy-holder  had  equal  and  exact  justice  done  him.  No  ex- 
pense to  the  company  was  involved  other  than  that  of  the 
extra  labor  incurred.  For  that  expense  the  company  has 
probably  been  fully  compensated  by  the  reduced  cost  of  the 
actuary's  department  since  Mr.  Homans  left." 

After  what  has  been  said  this  needs  no  comment. 
It  speaks  for  itself.  The  reply  of  Mr.  Homans 
follows,  quoted  from  the  "  New  York  Herald,"  of 
July  19,  1873  :— 

"  Had  Mr.  Winston  given  to  his  interviewer  the  facts  in- 
stead of  his  opinions,  and  allowed  the  public  to  form  their 
conclusions,  no  notice  of  the  matter  on  my  part  would  have 
been  necessary.  The  facts  are  these : — 

"  In  November,  1869, 1  was  the  auditor  of  the  Mutual  Life 
Company,  and  Mr.  Winston  the  president.  He  brought  to 
me  for  audit  the  official  quarterly  statement  of  receipts  and 
payments,  prepared  under  his  direction  by  the  bookkeeper, 
in  such  manner'that,  upon  investigation,  I  detected  the  fact 
that  certain  items  had  been  improperly  withheld  in  the  final 
payments  of  death-claims  to  the  representatives  of  deceased 
policy-holders,  the  books  of  the  company  having  been  al- 
ready prepared,  under  his  order,  with  a  view  to  deprive  such 
parties  of  said  amounts  so  due  them.  To  audit  this  state- 
ment by  certifying  the  same  in  the  usual  manner  to  be  cor- 
rect, would  have  been  justifying  him,  and  involving  myself 
as  an  accomplice  in  the  perpetration  of  an  act  of  dishonesty 
to  the  policy-holders,  and  a  direct  violation  of  the  charter  of 
the  company.  I,  therefore,  declined  auditing  the  statement, 
beyond  certifying  that  the  same  '  was  in  accordance  with  the 
entries  upon  the  books  of  the  company.'  This  certificate  he 
passionately  and  violently  erased,  with  the  threat  that  if  I  did 


Life  Insurance. 


203 


not  audit  the  statement  in  the  usual  manner,  he  would  find 
somebody  else  for  actuary  who  would. 

"  That  in  this  matter  I  was  unfaithful  to  Mr.  Winston  in  his 
scheme  for  defrauding  the  beneficiaries  under  certain  policies 
of  the  company  I  admit,  but  unfaithful  to  the  company, 
never.  That  to  Mr.  Winston  J  was  in  this  matter  impracti- 
cable, insubordinate,  and  obstinate  is  certainly  true. 

"Upon  this  occurrence,  it  of  course  became  necessary  that 
I  should  be  got  rid  of;  but  Mr.  Winston  does  little  justice  to 
his  position  in  the  company  by  stating  that  the  trustees  de- 
termined to  get  rid  of  me.  If  the  trustees  had  come  to  such 
a  determination,  it  would  have  been  practically  of  but  little 
moment,  unless  Mr.  Winston  so  willed  it.  I  was  got  rid  of 
by  Mr.  Winston.  Ever  since  he  ousted  Mr.  Collins  from  the 
presidency  by  the  secret  collection  of  proxies,  Mr.  Winston 
has  held  absolute  control  of  the  company  by  keeping  in  his 
possession  proxies  of  such  policy-holders  as,  having  given 
them  originally  upon  the  solicitation  of  his  agents,  have  been 
too  indifferent  or  too  indolent  to  cancel  them.  Each  of  his 
trustees  holds  his  place  by  the  appointment  or  toleration  of 
Mr.  Winston,  and  from  time  to  time,  the  most  respectable 
merchants,  who  have  been  members  of  his  board,  have  been 
got  rid  of  for  exhibiting  obstinacy,  impracticability  and  in- 
subordination, amounting  to  unfaithfulness  to  Mr.  Winston, 
in  regard  to  such  schemes  and  practices  of  his  as  he  may  not 
have  been  able  to  conceal  from  the  knowledge  of  the  trustees. 

"  His  charge  of  incompctency,  in  that  I  was  accountable  for 
the  fearful  blunder  in  distribution  of  surplus  in  1870,  and 
that  said  blunder  was  occasioned  by  a  mistake  of  mine,  is 
simply  untrue.  It  was  occasioned  by  the  direct  interference 
of  Mr.  Winston,  in  opposition  to  the  decision  of  distinguished 
referees,  which  had  been  approved,  adopted  and  ordered  to 
be  carried  out  by  the  board  of  trustees,  and  he  is  responsible 
for  the  blunder,  as  he  well  knows.  Mr.  Winston  never 
would  have  made  this  charge  agajnst  me  exaept  under  the 


£04  Politics  and  Mysteries  of 

excitement  of  feeling  growing  out  of  a  circumstance  beyond 
my  control — viz.,  that  I  lately  gave  testimony,  under  the 
compulsory  process  of  subpoena,  before  the  assembly  com- 
mittee, during  an  investigation  which  resulted  in  his  convic- 
tion of  malfeasance  in  office,  of  the  unwarranted  use  of  trust 
funds  by  him,  aud  fraudulent  attempts  at  concealment  of  his 
conduct  by  false  and  altered  entries  in  the  books  of  the  com- 
pany." 

One  of  the  most  remarkable  features  of  life 
insurance  at  present  is  covered  by  the  not  very 
appropriate  phrase  of  "tontine  policies."  It  is 
very  hard  to  understand  why  states  that  maintain 
laws  against  gambling,  pure  and  simple,  should 
allow  the  most  pernicious  sort  of  it  to  be  attached 
to  life  insurance,  and  perhaps  harder  still  to  under- 
stand why  State  Insurance  Departments  should 
maintain  so  mild  a  deportment  towards  a  scheme 
got  up  on  purpose  to  make  their  supervision  a 
farce.  Many  of  the  best  and  soundest  companies 
have  abstained  altogether  from  this  seductive  vice, 
and  it  deserves  to  be  said  to  the  credit  of  Mr. 
Winston  that  on  the  advice,  as  is  understood,  of 
Prof.  Bartlett,  his  present  actuary,  *tiie  Mutual  Life 
has  discarded  this  enormity  after  commencing  the 
practice  of  it.  As  long  as  the  law  allows  such 
policies  to  be  issued,  it  is  a  little  dubious  whether 
any  demonstration  of  their  nature  and  tendency 
does  not  do  more  hurt  than  good.  The  following 
essay  published  in  the  "  Insurance  Tirpes  "  has  been 


Life  Insurance.  205 

extensively  used  as  a  canvassing  document  by 
solicitors  of  tontine  business.  Nevertheless  it  is 
inserted  here  in  the  hope  that  it  may  stir  up  some 
public-spirited  reader  to  ask  the  legislature  either 
to  suppress  this  sort  of  policy  or  repeal  all  statutes 
against  gambling,  so  that  those  who  must  gamble 
will  have  no  excuse  for  defiling  a  good  institution 
with  their  constitutional  and  besetting  vice. 

THE  TONTINE  PLAN. 

In  every  life-insurance  company  of  large  extent  many 
policies  are  held  by  persons  of  considerable  estate,  who  have 
no  difficulty  in  paying  the  premiums,  and  who  would  by  no 
means  leave  their  families  destitute  if  their  claim  should  not 
be  paid  when  due.  Such  policies  doubtless  contribute  to  the 
strength  of  the  company,  and  it  is  no  reason  for  refusing  to 
insure  a  man  that  he  is  rich  enough  to  do  without  it.  A  rich 
man  may  insure  his  house,  why  not  his  life  ?  .  And  especially 
if  by  so  doing  he  strengthens  an  institution  which  provides 
an  indispensable  blessing  for  the  man  who  has  no  estate  but 
his  life? 

But  if  there  were  only  rich  men  in  the  world,  life-insur- 
ance companies  would  be  little  better  than  superfluous,  a 
waste  of  labor.  Their  true  function  is  to  provide  a  substitute 
for  wealth,  an  estate  which  a  poor  man  can  bequeath.  They 
exist  particularly  for  rub-and-go  people,  whose  year-ends 
scarcely  more  than  meet.  Such  people  always  compose  a 
very  large,  if  not  the  largest,  part  of  the  insured.  This  is  so 
true  that,  notoriously,  many  of  them  rub  and  don't  go.  In- 
surance is  a  great  blessing  to  them  while  they  can  keep  it 
up,  and  they  might  keep  it  up  longer  if  it  did  not  cost  too 
much. 

Now,  with  a  distinct  view  of  these  two  sorts  of  people 


206  Politics  and  Mysteries  of 

who  take  life-insurance  policies,  we  are  prepared  to  define, 
understand  and  appreciate  the  powerfully  and  expensively 
advertised  "  Tontine  Plan."  It  is  a  contrivance  to  facilitate 
the  going  of  the  people  who  can  go  without  rubbing,  at  the 
expense  of  the  rub-and-go  people.  Its  sole  and  only  function 
is  to  make  the  richer  part  of  the  company  richer  by  making 
the  poorer  part,  poorer.  It  does  not  introduce  into  the 
mechanism  a  single  additional  drop  of  lubricating  oil,  but  it 
takes  from  the  wheels  that  have  too  little  whatever  they  have, 
and  applies  it  to  those  that  have  no  lack.  It  cunningly  intro- 
duces into  the  body  of  the  policy  a  bet  on  the  persistence  of 
certain  annual  payments,  say  for  ten,  fifteen,  or  twenty  years, 
should  the  party  live  so  long.  This  little  gambling  arrange- 
ment, where  the  stake  in  the  company's  hands  is  the  legal 
reserve  and  the  surplus,  is,  of  course,  a  safe  thing  for  it.  It 
holds  a  considerable  sum  of  money  for  which  nobody  can 
call  it  to  account  short  of  at  least  ten  years.  This  is  a  very 
comfortable  thing  for  the  company  when  it  happens  to  be  as 
much  as  it  can  do  to  show  the  legal  reserve  under  the  high 
pressure  of  present  expenses.  But  it  is  rich,  operates  in  a 
palace  that  Midas  might  envy,  and  will  no  doubt  have  the 
stakes  ready  to  fork  over  af  the  end  of  a  decade.  Such  is  the 
presumption,  How  about  the  parties  to  the  little  game, 
by  which  is  meant  the  tontine  feature  as  distinct  from  the 
insurance  ? 

The  losers  are,  first,  those  who  have  died  in  the  meantime, 
and,  second,  those  who  have  lapsed  or  forfeited  their  poli- 
cies. The  winners  are  those  who  have  survived  and  kept 
their  policies  in  force — supposing  the  company  pays  them 
what  the  losers  have  lost,  a  supposition  that  calls  for  a  certain 
amount  of  faith.  The  losers  who  have  died,  have  lost  by  the 
tontine  bet  only  such  surplus  as  had  accrued  up  to  the  time 
of  their  death.  This  part  of  the  loss,— much  the  smallest, 
probably,  for  in  ten  years  there  are  commonly  many  lapses 
to  one  death,  and  surplus  is  always  small  compared  with 


Life  Insurance.  207 

reserve, — falls  equally  on  rich  and  poor.  So  that  the  game — 
one  loves  to  call  it  a  little  game — is  fair  enough,  as  a  game, 
J[n  regard  to  this  part  of  it.  The  losers  who  have  lapsed, 
have  lost  both  surplus  and  reserve,  as  they  existed  at  the  date 
of  lapse.  This  is  what,  without  exactly  knowing  its  amount, 
they  bet  on  their  ability  to  meet  ten,  fifteen  or  twenty  annual 
payments.  Here  the  bulk  of  the  loss  is  sure  to  fall  on  those 
least  able  to  bear  it,  and  the  winnings  go  to  those  who  least 
need  them.  As  a  game  of  long  purses  against  short  ones,  it 
can  hardly  be  said  to  be  fair.  fAt  any  rate,  the  average 
effect  must  be  exactly  the  reverse  of  the  avowed  object  of 
the  institution.  It  is  as  if  a  temperance  society  should 
endeavor  to  promote  its  cause  by  establishing  a  liquor  saloon 
under  its  lecture  room,  or  a  church  should  support  its  minister 
by  a  lottery. 

Insurance's  necessarily,  to  a  certain  extent,  a  game  of 
chance.  Its  peculiar  benefit  arises  out  of  this  fact.  But  the 
hazard  should  be  kept  at  a  minimum.  The  little  appended 
game,  called  the  "  Tontine  Plan,"  is  wholly  extraneous, 
superfluous  and  unnecessary.  It  could  not  possibly  flourish 
if  the  fools  were  all  dead,  or  nearly  all.  For  that  matter,  we 
know  that  highly  gullible  but  not  unworthy  people  so 
abound,  that  lotteries  and  many  other  sorts  of  gambling  could 
flourish,  if  only  legislatures  would  give  sufficient  corporate 
facilities.  Why  they  allow  their  creatures  who  are  authorized 
to  deal  in  life-insurance  to  entrap  the  unwary  by  these  ton- 
tine plans,  mignt  perhaps  become  known  to  the  public  if  the 
advertisements  of  them  were  not  too  profitable  to  admit  of 
free  discussion  in  the  daily  press. 


208  Politics  and  Mysteries  of 


Chapter  X. 
THE  MONEY  .  QUESTION  IN  RELATION  TO  LIFE  INSURANCE. 

[From  the  Insurance  Times.]  • 

As  concerned  in  contracts  of  the  longest  duration,  a  life- 
insurance  company  has  a  deeper  interest  in  the  constancy  of 
the  money  unit  than  any  other  financial  institution.  The 
latest  Massachusetts  Report  gives  a  list  of  fifty-five  life-insur- 
ance companies  of  which  the  gross  assets,  using  the  existing 
money  unit,  are  $290,563,953.47,  while  the  present  value  of 
the  future  liabilities,  using  the  same  unit,  are  $261,662,482.40, 
showing  a  surplus  as  regards  policy-holders,  of  f  28,901,471.07. 
Now,  on  the  assumption  that  the  unit  of  this  numerical  state- 
ment is  to  remain  a  constant  or  fixed  quantity  in  regard  to 
value,  or  that  its  value  will  not  vary  materially  in  the  proc- 
ess of  time,  this  statement  only  needs  to  be  true  to  be  highly 
satisfactory  to  the  policy-holders. 

But  unfortunately  the  value  of  this  money  unit,  which  has 
varied  exceedingly  in  the  last  twelve  years,  is  by  no  means 
fixed  for  the  future,  but  is  left  at  the  mercy  of  causes  which 
are  sure  to  produce  not  only  fluctuations,  but  such  as  are 
incapable  of  confinement  within  predicted  limits.  Com- 
pared with  the  sum  which  would  appear  by  using  the  unit  of 
the  gold  coinage,  the  least  variable  standard  of  value  known 
among  men,  the  gross  assets  of  the  above  •companies  are 
now  only  about  f  254,900,000.  As  the  gross  liabilities,  ex- 
cept to  a  very  small  extent,  will  not  mature  till  a  distant  day, 
and  may  then  have  to  be  paid  in  a  currency  as  valuable  as 
gold,  it  is  too  plain  that  a  slight  cloud  rests  on  the  question 
of  the  average  future  solvency  of  these  companies.  For,  if 
we  are  to  have  specie  payment  by  and  by,  instead  of  there 
being  a  surplus  now,  as  regards  policy-holders,  of  nearly 
$29,000,000,  there  is  really  a  present  deficiency  of  about 
$6,000,000.  On  the  contrary,  if  we  are  not  to  have  specie 


•  Life  Insurance.  209 

payment  by  and  by,  but  a  fluctuating  descent  towards  noth- 
ingness, of  which  no  prophet  can  foretell  the  law  of  curva- 
ture, then,  though  the  assets  are  at  present  abundant,  no 
prudent  man  will  be  tempted  to  add  to  them,  because  the 
probability  is  that  he  will  have  paid  more  valuable  dollars 
than  his  heirs  will  receive.  The  actuary,  having  made 
careful  observations  for  a  series  of  years,  on  the  rates  of  in- 
terest and  mortality,  bases  the  business  of  life  insurance  on 
certain  assumptions  in  regard  to  these  two  things  which  he 
regards  as  perfectly  safe.  Supposing  them  to  be  so,  in  vain 
are  all  his  labors,  unless  the  value  of  the  money  unit  of  his 
calculations  is  to  be  as  constant,  at  the  least,  as  that  of  a 
given  weight  of  pure  gold.  If  a  legislature  steps  in  and 
decrees  that  a  piece  of  paper  which  is  worth  only  x  cents  in 
the  market,  while  a  gold  dollar  is  worth  100,  shall  be  the 
dollar  or  money  unit,  and  the  life-insurance  company  re- 
serves accordingly,  carrying  1 — x  per  cent,  of  its  reserve  to 
dividend,  on  account  of  this  interference,  the  actuary  may  as 
well  retire,  and  amuse  himself,  as  he  can,  in  the  abstract  wil- 
derness of  imaginary  quantities.  The  legislative  wisdom 
has  simply  made  the  assured  solvency  of  a  life-insurance 
company  an  insoluble  problem. 

The  importance  of  this  subject,  in  the  present  attitude  of 
life  insurance,  is  my  excuse  for  venturing  a  few  words  on 
the  elementary  principles  of  money  and  the  stability  of  its 
unit. 

Money,  as  known  to  us,  is  the  product,  more  or  less  entire- 
ly, of  legislation ;  and  consists,  practically,  either  of  metals 
coined  by  the  government,  or  the  promises  of  the  govern- 
ment, or  of  individuals  or  corporations  authorized  by  it,  to 
pay  such  coins ;  or,  theoretically,  the  expression  of  the  sover- 
eign will  of  the  government  that  certain  pieces  of  paper, 
without  regard  to  any  intrinsic  value  they  have,  shall  be  re- 
ceived and  used  as  money. 

We  commonly  call  money  the  measure  or  standard  of 


^ 
y* 


210  Politics  and  Mysteries  of 

value,  and  this,  perhaps,  is  as  far  as  we  can  go  without  con- 
sidering the  meaning  of  the  word  value.  Value  is  not  an  in- 
herent quality  of  any  object,  material  or  immaterial.  Neither 
gold  nor  wheat  has  any  value  in  itself.  The  value  lies  in  the 
affection  of  the  mind  of  the  valuer  towards  the  thing  valued. 
This  differs  widely  in  different  persons  towards  different 
objects,  and  this  difference  lays  the  foundation  of  that  legiti- 
mate commerce  in  which  the  parties  on  either  side  make  a 
profit.  Value  is  either  special  or  general,  particular  or  aver- 
age. When  we  talk  of  a  standard  of  value  we  mean  some- 
thing which  agrees  with  or  represents  the  average  attraction 
between  a  human  mind  and  various  objects.  This  standard 
is  also  called  market  price.  If  a  gold  dollar  will  buy  a 
bushel  of  wheat,  a  yard  of  silk,  or  a  pint  of  wine,  we  call  the 
dollar  the  measure  of  the  value  of  wheat,  silk,  or  wine  ;  but 
in  reality  the  dollar  no  'more  measures  the  value  of  the  wheat, 
silk,  or  wine,  than  either  of  them  measures  the  value  of  the 
dollar.  The  only  difference  is  that  the  dollar  is  used  by 
everybody  in  exchange  for  almost  everything,  whereas  any- 
thing else  is  used  instead  of  it  only  in  the  rare  cases  of  com- 
merce called  barter.  The  only  reason  why  we  select  the 
gold  and  call  it  the  measure  or  standard  of  the  value  of 
other  commodities,  is  the  convenience  of  bringing  all  other 
things  to  a  comparison  with  the  one  which  is  the  most  port- 
able and  least  perishable,  and  which,  on  account  of  the  high 
affection  of  the  average  mind  towards  it,  is  most  sure  to  bring 
in  exchange  for  it  anything  which  may  be  desired.  Though 
value  is  not  a  quality  of  any  object,  it  always  depends  upon 
the  qualities  of  the  object  as  well  as  upon  the  character  and 
circumstances  of  the  individual  who  values.  Thus  gold,  by 
the  qualities  which  make  it  clearly  king  of  the  metals,  has 
been  more  universally,  perhaps,  than  anything  else,  an  object 
of  desire  and  affection  to  human  beings  in  all  ages  ;  and  its 
scarcity,  or  rather  the  great  amount  of  labor  and  search 
which  is  required  to  get  possession  honestly  of  a  given  quan- 


Life  Insurance.  211 


tity  of  it,  has  hitherto  made  it  exceedingly  convenient, 
determined  in  quantity  "by  coinage,  as  a  medium  of  exchange. 
A  starving  man  might  be  willing  to  give  sixteen  ountes  of 
gold  for  a  pound  of  beefsteak,  and  if  all  men  were  in  a  state 
of  starvation,  gold  would  be  out  of  the  question  as  currency. 
But,  as  things  have  been,  no  surer  way  of  reducing  to  a 
minimulh  the  fluctuations  of  value  in  the  money  unit  has 
ever  been  devised  than  to  fix,  as  that  unit,  a  duly  certified 
weight  of  pure  gold.  Yet  almost  the  whole  worjd  has  gone 
a  long  way  beyond  the  use  of  actual  gold  as  the  circulating 
money.  Promises  of  money  have,  in  fact,  become  money. 
And  inasmuch  as  these  promises,  when  made  or  endorsed  by 
governments  do  serve  the  purpose  of  money  in  the  absence 
of  performance,  we  have  to  consider  a  species  of  money 
which  may  be  described  as  the  will  of  the  government  coined 
on  paper.  This  is  the  theoretical  limit,  to  which  the  non- 
payment of  promised  dollars  tends. 

Let  us  then  consider  a  purely  arbitrary  paper  currency, 
made  a  legal  tender  exclusively  for  all  debts,  to  see  by  what 
means  any  stability  can  be  given  to  the  value  of  its  unit,  or 
in  other  words  how  its  purchasing  power  can  be  made  con- 
stant or  to  approach  constancy.  Anything  which  is  good  to 
pay  old  debts,  and  which  will  be  received  in  payment  of 
taxes,  will  certainly  have  a  commercial  value  or  purchasing 
power  in  regard  to  commodities,  arid  this  will  depend  largely 
upon  its  scarcity.  If  by  an  irresistible  government  it  should 
be  substituted  for  an  equal  amount  of  metallic  money,  it 
would  probably  start  with  the  same  purchasing  power.  But 
not  being  convertible  into  coin,  its  future  could  have  no  rela- 
tion whatever  to  the  value  of  coin  or  the  material  of  which  it 
is  composed.  Naturally,  if  the  government  expenditure 
should  exceed  its  income  from  taxation  the  volume  of  this 
currency  would  increase,  and  if  the  increase  should  exceed 
the  increase  of  population  and  the  demands  of  commerce  it 
would  depreciate  in  value.  It  could  only  rise  in  value  by  the 


212  Politics  and  Mysteries  of 

taxes  exceeding  the  expenditures,  a  hardly  supposable  case, 
unless  the  government  should  see  fit  to  allow  the  people  to 
regulate  the  volume  by  regarding  it  as  a  sort  of  flebt  (which 
is  contrary  to  our  hypothesis)  to  be  funded  at  the  option  of 
the  holder  against  the  government.  It  is  a  favorite  theory 
with  some  financiers  that  the  perfection  of  paper  currency 
would  be  to  have  it  entirely  independent  of  coin,  a%d  capa- 
ble of  drawing  interest  in  kind  from  the  government  at  a 
prescribed  jate  by  being  exchanged  for  coupon  bonds  at  the 
option  of  the  holder.  They  say  whenever  this  currency 
should  become  excessive,  tending  to  a  rise  of  prices  of  com- 
modities, then  people  would  seek  and  obtain  government 
bonds.  Whenever  it  should  become  scarce,  reducing  prices, 
people  would  sell  their  bonds  to  the  government  to  make  it 
plentier  and  raise  prices.  Such  an  arrangement  would  un- 
questionably tend  to  steady  the  purchasing  power  of  such  a 
currency,  but  no  such  effect  would  be  produced  unless  the 
government  kept  the  price  received  for  such  bonds  out  of 
circulation  by  treating  it  as  so  much  waste  paper,  and  then  it 
would  be  paying  interest,  and  taxing  the  people  to  do  so,  in 
order  to  favor  sellers  at  the  expense  of  buyers — paying  inter- 
est, in  fact,  on  what  could  not  be  considered  in  any  sense  as 
debt  without  upsetting  the  logical  basis  of  the  whole  system. 
But  the  grand  and  insurmountable  objection,  in  this 
country,  to  this  coinage  of  the  government's  will  into  a  com- 
mercial circulating  medium,  an  objection  which  precludes 
any  approach  to  constancy  of  value,  is  our  popular  govern- 
rnent.  There  is  no  stable  will  to  be  coined.  With  an  auto- 
cratic dynasty,  it  might  be  otherwise.  At  any  rate  we  can 
imagine  that  in  such  a  dynasty  there  might  be  a  coinable 
will,  descending  from  father  to  son,  uninfluenced^  by  the 
clamor  of  debtor  and  creditor  classes  against  each  other, 
deaf  to  expansionists  and  contractionists  alike,  and  that  it 
should  so  regulate  the  income  and  outgo  from  its  exchequer 
of  a  commodity  of  its  own  creation,  so  costless  to  itself  and 


Life  Insurance.  213 

eo  precious  to  the  people,  as  to  keep  its  purchasing  power 
reasonably  steady.  This  is  barely  conceivable.  But  when 
we  have  conceived  of  it  we  have  conceived  of  something 
which  does  not  exist  anywhere  in  this  age  of  the  world,  and 
still  is  no  better,  if  it  is  not  worse,  than  what  nature  has  done 
for  us  in  her  rare  and  well  concealed  deposits  of  gold. 

For  the  people  who  periodically  create  our  government  by 
a  process  which  very  imperfectly  represents  their  collective 
or  average  will,  much  less  their  interests,  to  allow  it  to  create 
money  out  of  nothing,  is  simply  allowing  it  to  set  up  a  rubber 
balloon  between  two  factions  of  "  bulls "  and  "  bears,"  one 
blowing  into  it  for  expansion,  the  other  sucking  out  for  its 
collapse.  Taking  it  pure  and  simple,  it  is  clearly  a  project  to 
be  let  alone.  In  the  first  place  there  could  be  no  calculable 
stability  under  it.  In  the  second,  it  would  inevitably  corrupt 
the  government  and  lead  to  anarchy. 

Now,  we  are  suffering  these  very  same  results,  the  instabil- 
ity natural  to  such  a  system,  enhanced  by  unproductive  and 
parasitic  speculators,  under  a  currency  professedly  created 
out  of  the  government  debt,  a  debt  which  recognizes,  in  some 
sense,  that  constitutional  standard  of  value  of  which  the  mint 
is  the  organ,  because  the  said  debt  is  not  duly  honored.  In 
fact,  all  the  evils  which  must  necessarily  result  from  a  per- 
fectly arbitrary  paper  currency,  under  any  circumstances, 
will  result  from  an  inconvertible  debt  currency, — and  proba- 
bly more,  on  account  of  its  being  a  patent,  self-evident  im- 
morality on  its  face.  It  being  a  part  of  the  business  of  any 
government  to  enforce  the  honest  payment  of  private  debts, 
its  doing  with  its  own  debt  what  it  would  be  dishonest  for  a 
private  citizen  to  do  with  his,  can  hardly  fail  to  have  a  bad 
moral,  as  well  as  financial  effect. 

I  have  referred  to  the  moral  aspect  of  the  matter,  because 
it  more  or  less  concerns  the  remedy  for  an  evil,  which,  to  life 
insurance,  is  simply  intolerable.  If  there  were  no  moral 
wrong,  no  unhingement  of  a  nation's  credit,  in  its  open  vio- 


214  Politics  and  Mysteries  of 

lation  of  its  promise,  the  simplest  and  best  way  to  arrive  at 
stability  of  value  in  the  money  unit,  would  be  to  reduce  the 
weight  of  the  dollars  at  the  mint  to  the  value  of  the  paper 
dollars  to-day,  and  henceforward  redeem  the  greenbacks  on 
demand  with  these  new  dollars.  This  would  remove  the  ob- 
jection to  immediate  resumption,  to  which  President  Grant 
alluded  in  his  inaugural  of  1868,  as  the  only  one  then  exist- 
ing, to  wit,  that  of  its  injustice  to  the  debtor  class.  If,  how- 
ever, such  an  act  would  be  morally  wrong,  and  would  bring 
upon  the  nation  discredit  and  disgrace,  it  must  be  avoided. 
But  avoiding  it  for  this  reason,  we  necessarily  admit  that  the 
suspense  of  payment  is  equally  immoral,  unless  the  govern- 
ment lacks  the  means,  or  the  ability  to  borrow  the  means,  to 
pay  its  non-interest-bearing  notes  on  demand  in  full.  It  cer- 
tainly cannot  be  said  that  the  government  of  a  country  worth 
$30,000,000,000,  and  covering  its  full  proportion  of  the  gold 
mines  of  the  world,  at  a  time  when  the  owners  of  gold  are 
giving  more  than  par  for  its  six  per  cent,  bonds,  is  unable  to 
redeem  every  dollar  of  its  non-interest-bearing  debt  as  fast 
as  it  could  be  presented.  Only  the  grossest  ignorance  or  the 
most  brazen  impudence  could  make  such  an  assertion. 

We  are  brought  then  into  the  presence  of  a  conflict  of  two 
evils.  On  the  one  hand,  a  perennial  violation  of  the  national 
promise ;  on  the  other,  an  alleged  injustice  to  a  not  easily 
defined  "  debtor  class."  It  is  to  be  observed  that  the  latter  is 
temporary,  that  it  is  pretty  exactly  balanced,  in  a  pecuniary 
sense,  by  an  advantage  conferred  on  a  correlative  creditor 
class,  and  that  most  people  belong,  more  or  less,  to  both 
classes  at  the  same  time.  The  case  is  very  much  like  an  in- 
exorable, incurable  toothache  on  one  side,  and  the  pain  of 
extraction  on  the  other.  If  the  big  patient  prefers  to.  endure 
the  "  hell  o'  a'  diseases,"  rather  than  to  have  the  dentist  apply 
his  forceps  too  suddenly,  that  artist  will  of  course  have  the 
kindness  to  allow  him  a  few  months  in  which  to  screw  up 
his  courage.  But  the  thing  is  not  likely  to  stay  in  more  than 


Life  Insurance.  215 

half  a  year,  without  throwing  the  balance  of  the  ache  largely 
on  the  side  of  the  retained  tooth. 

I  must  beg  the  pardon  of  certain  pedantic  writers  on  cur- 
rency for  coming  so  near  the  close  of  what  I  have  to  say 
without  noticing  their  argument,  very  popular  with  the  para- 
sitic class  of  gold  gamblers,  to  prove  that  before  the  govern- 
ment can  safely  resume  specie  payments  it  must  contract  the 
paper  currency  to  about  the  volume  it  had  when  the  state 
banks  issued.it  and  redeemed  it  in  gold.  These  writers,  not 
happening  to  find  laid  down  in  the  books  they  sjudy,  the  fact 
that  the  volume  of  a  paper  currency  resting  on  a  specie  basis 
depends  not  only  upon  the  amount  of  commodities  to  be  ex- 
changed, and  the  complexity  of  the  distribution,  but  upon 
the  intensity  of  the  public  confidence  in  the  solvency  of  the 
currency,  have  ignored  it  altogether.  They  should  have 
studied  the  children's  game  with  the  paper  torch,  which,  hav- 
ing quenched  its  flame  without  putting  out  its  fire,  they  pass 
around  a  circle,  each  one  saying  as  he  holds  it,  "  Robin's 
ali^e,  as  live  as  a  bee,  if  he  dies  in  my  hand  you  may  pack- 
saddle  me."  It  passes  till  the  last  spark  expires,  and  the 
more  rapidly  the  sparks  take  their  leave,  the  faster  it  circu- 
lates. So  it  is  with  paper  money ;  the  less  the  public  confi- 
dence in  it,  the  faster  it  will  circulate,  and  the  less  of  it  it 
will  therefore  take  to  do  a  given  amount  of  work.  The  peo- 
ple confide  in  the  general  government  as  being  vastly  more 
exempt  from  the  danger  of  bankruptcy  than  any  set  of  state 
banks  that  ever  existed,  and  this  accounts  for  the  fact  that 
they  are  contented  to  hold  in  their  hands  a  much  larger  volume 
of  the  present  paper,  in  proportion  to  the  business  they 
have  to  do  with  it*  than  they  ever  did  of  bank  paper.  Were 
it  readily  convertible  into  specie,  and  sure  to  maintain  the 
same  purchasing  power  as  gold,  they  would  be  contented  to 
hold  rather  more  than  less ;  in  other  words,  the  confidence  in 
it  being  still  more  enhanced,  it  would  circulate  more  slug- 
gishly, requiring  a  greater  volume  rather  than  a  less.  But  it 


216  Politics  and  Mysteries  of 

is  useless  to  oppose  facts  to  the  theories  of  these  writers,  as 
they  are  sure  to  fall  back  on  their  maxim,  "  So  much  the 
worse  for  the  facts  if  they  differ  from  our  scientific  princi- 
pj.es."  One  thing  is  quite  certain,  that  if  resumption  has 
to  wait  for  the  contraction  these  writers  recommend,  it  will 
never  occur. 

What  resumption  is  really  waiting  for,  is  the  waking  up  of 
a  majority  of  the  people  who  are  not  engaged  in  gambling 
under  the  name  of  trade,  and  not  too  deeply  interested  in  the 
privilege  unwisely  and  unjustly  conceded  to  the  national  banks, 
to  the  very  simple  truth  that  every  circulating- note,  as  to  the 
difference  between  it  and  the  capital  which  the  issuer  has  to 
hold  idle  for  its  redemption,  is  a  loan  from  the  holder  to  the 
issuer  without  interest.  They  will  then  begin  to  see  that  as  long 
as  the  government  is  a  debtor,  it  can  furnish  the  best  possible 
currency,  and  ought  to  furnish  the  whole  which  is  allowed  to 
circulate,  by  being  a  perfectly  honest  and  honorable  debtor, 
paying  its  non-interest-bearing  debt  on  demand,  and  borrow- 
ing at  market  interest  all  the  funds  necessary  to  enable  it  to 
do  so.  It  then  gratifies  every  individual  contractionist  to  liis 
heart's  content  by  redeeming  all  the  greenbacks  he  presents, 
and  every  individual  expansionist,  by  issuing  greenbacks  at 
par  for  all  the  gold  or  government  bonds  he  presents.  They 
will  then  begin  to  see  that  the  national  banks,  in  receiving 
the  full  interest  on  the  bonds  which  they  pledge  to  the  gov- 
ernment to  sustain  their  circulation,  in  spite  of  the  tax  under 
the  provisions  of  the  National  Banking  Act,  really  get  the 
lion's  share  of  the  profit  of  that  circulation,  the  whole  of 
which  should  belong  to  the  government,  or  in  other  words  to 
the  people.  They  will  then  see  that  if  corporations  or  pri- 
vate citizens  own  government  bonds,  and  are  not  contented 
with  the  interest  they  get,  but  want  to  convert  them  into 
money  to  lend  at  a  higher  interest,  the  best  way  for  the  gov- 
ernment, if  not  for  them,  is  that  they  sell  the  bonds  out  and 
out  to  the  government  for  greenbacks,  and  lend  them.  The 


Life  Insurance.  217 

government  thus  saves  nearly  the  interest,  which  is  much 
more — in  years,  many  millions — than  any  tax  on  circulation 
which  it  does  or  could  get  out  of  the  banks,  and  the  extra 
cost  of  hundreds  of  different  editions  of  bills  is  saved,  to  say 
nothing  of  the  simplification  of  the  public  accounts.  A  pri- 
vate Uncle  !?amuel  who  had  a  big  money  debt  against  real 
estate  so  ample  and  undoubted  that  his  neighbors  should  be 
glad  to  use  a  third  of  it  for  money,  in  the  shape  of  his  I O  IPs, 
without  interest,  would  not  be  likely  to  give  away  this  advan- 
tage, or  sell  it  for  half  its  value,  neither  will  a  majority  of  our 
people,  when  they  begin  to  see  through  their  own  affairs. 

There  is  no  sound  policy  for  any  life-insurance  company, 
let  the  government  do  what  it  will,  but  to  transact  all  its 
affairs  in  strict  accordance  with  a  specie  basis,  and  exert 
what  influence  it  can  to  arouse  the  people  to  see  the  necessity 
of  it  for  their  own  interests  as  well. 

10 


Appendix. 


APPENDIX. 


THE  ACTUARIES'  RATE  OF  MORTALITY,  WITH  NATURAL 
PREMIUMS  AT  4  PER  CENT., 

Derived  from  the  combined  experience  of  seventeen  English  Companies. 


AGE. 

to 
•9 

3 

i 

Chances  of  dying 
in  one  year  out 
of  1,000. 

Natural  Premium 
to  insure  $1,000 
one  year. 

i?;  :  :  :  :  : 

100,000 
99,324 

676 
674 

6  76 
6  79 

$6  50 
653 

12, 

98,650 

672 

6  81 

6  55 

13;  .  :  :  :  : 

97,978 

.   671 

6  85 

6  59 

14,   
15,   

97,307 
96,636 

671 
671 

6  90 
6  94 

6  63 
6  68 

16,   

95,965 

672 

7  00 

6  73 

17  

95,293 

673 

7  06 

6  79 

18,   

94,620 

675 

7  13 

6  86 

19,   

93,945 

677 

7  21 

6  93 

20,   

93,268 

680 

7  29 

7  01 

21,   

92,588 

683 

7  38 

7  09 

22,   

91,905 

686 

7  46 

7  18 

23,   

91,219 

690 

7  56 

7  27 

24,   

90,529 

694 

7  67 

7  37 

25, 

89,835 

698 

7  77 

7  47 

26,   

89,137 

703 

7  89 

7  58 

27,   

88,434 

708 

8  01 

7  70 

28,   

87,726 

714 

8  14 

7  83 

29,   

87,012 

720 

8  28 

7  96 

30,   

86,292 

727 

8  42 

8  10 

31,   

85,565 

734 

8  58 

8  25 

32,   

84,831 

742 

8  75 

8  41 

33,   

84,089 

750 

8  92 

8  58 

34,   
35,   

83,339 
82,581 

758 
767 

9  10 
9  29 

8  75 
8  93 

36, 

81,814 

776 

9  48 

9  12 

37 

81,038 

785 

9  69 

9  31 

Appendix. 


219 


The  Actuaries*  Rate  of  Mortality — Continued. 


AGE. 

j 

I 

Chances  of  dying 
in  one  year  out 
of  1,000. 

Natural  Premium 
to  insure  $1,000 
one  year. 

38,   

80,253 

795 

9  91 

$9.53 

39,   

79,458 

805 

10  13 

9  74 

40 

78653 

815 

10  36 

9  96 

41,   

77,838 

826 

10  61 

10  20 

42,   

77,012 

839 

10  89 

10  48 

43,   

76,173 

857 

11  25 

10  82 

44,   

75,316 

881 

11  70 

11  25 

45,   

74,435 

•  909 

12  21 

11  74 

46,   

73,526 

944 

12  84 

12  35 

47,   

72,582 

981 

13  52 

13  00 

48,   

71,601 

1,021 

14  26 

13  71 

49,   

70,580 

1,063 

15  06 

14  48 

50,   

69,517 

1,108 

15  94 

15  33 

51,   

68,409 

1,156 

16  90 

16  25 

52,   

67,253 

1,207 

17  95 

17  26 

53,   

66,046 

1,261 

19  09 

18  36 

54,   

64,785 

1,316 

20  31 

19  53 

63,469 

1,375 

21  66 

20  83 

56,   

62,094 

1,436 

23  13 

22  24 

57,   

60,658 

1,497 

24  68 

23  73 

58,   t   .... 

59,161 

1,561 

26  39 

25  37 

59,   

57,600 

1,627 

28  25 

27  16 

60,   

55,973 

1,698 

30  34 

29  17 

61,   

54,275 

1,Z70 

32  61 

31  36 

62,   

52,505 

1,844 

35  12 

33  77 

63,   ' 

50,661 

1,917 

37  84 

36  38  ' 

64,   

48,744 

1,990 

40  83 

39  26 

65,   

46,754 

2,061 

44  08 

42  39 

66,   

44,693 

2,128 

47  61 

45  78 

67,   

42565 

2  191 

51  47 

49  49 

68,   

40,374 

2,246 

55  63 

53  49 

69,   

38,128 

2,291 

60  09 

57  78 

70,   

35,837 

2,327 

64  93 

62  44 

71,   

33,510 

2,351 

70  16 

67  46 

72,   ..... 

31,159 

2,362 

75  80 

72  89 

73,   

28,797 

2,358 

81  88 

78  73 

74,   

26,439 

2,339 

88  47 

85  07 

75,   

24,100 

2,303 

95  56 

91  89 

76,   

21,797 

2,249 

103  18 

99  21 

77,   

19,548 

2,179 

111  47 

107  18 

78, 

17,369 

2,092 

120  44 

115  81 

220 


Appendix. 


The  Actuaries*  Hate  of  Mortality  —  Concluded. 


AGE. 

£ 

•9 

3 

£ 

a 
I 

Chances  of  dying 
in  one  year  out 
of  1,000. 

Natural  Premium 
to  insure  $1,000 
one  year. 

79, 

15,277 

1  987 

130  06 

$125  06 

80,   ... 

13,290 

1,866 

140  41  . 

135  01 

8i,  :  .... 

11,424 

1,730 

151  44 

145  61 

82, 

9,694 

1  582 

163  19 

156  92 

83  :  :  :  :  : 

8,112 

1,427 

175  91 

169  15 

84,   

6,685 

1,268 

189  68 

182  38 

85,   

5,417 

1,111  • 

205  10 

197  21 

86,   

4,306 

958 

222  48 

213  92 

87,   

3,348 

811 

242  23 

232  92 

88,   

2,537 

673 

265  27 

255  07 

89,   

1.864 

545 

292  38 

281  14 

90, 

1,319 

427 

323  73 

311  28 

91,   
92   
93,   

892 
570 
339 

322 
231 
155 

360  99 
405  26 
457  23 

347  10 
389  68 
439  64 

94,   

184 

95 

516  30 

496  45 

95   

89 

52 

584  27 

561  80 

96,   

37 

24 

648  65 

623  70 

97,   

13 

9 

692  31 

665  68 

98   

4 

3 

750  00 

721  15 

99, 

1 

1 

1,000  00 

961  54 

The  reader  of  the  foregoing  pages  has  not  failed 
to  perceive  that  the  writer  has  been  for  some  time 
engaged  in  a  controversy,  or  struggle  for  reform, 
with  the  guardians  of  the  people's  money  opposed 
to  him.  He  has  not,  however,  stood  entirely 
alone.  And  he  desires  here  to  return  his  cordial 
thanks  to  the  editors  of  the  insurance  press,  who 
have  almost  without  exception  treated  him  with 
courtesy,  and  in  many  cases  with  solid  support ;  in 
fact  all  they  could,  and  live.  His  thanks  are  es- 


Appendix.  221 

pecially  due  to  the  plucky  editor  of  the  INSURANCE 
TIMES,  who  has  shirked  no  risk  or  expense  in  giv- 
ing fair  play  to  the  most  revolutionary  utterances. 
The  volumes  of  that  journal  are  invaluable,  as  con- 
taining about  all  that  has  been  or  need  be  said,  on 
both  sides  of  the  disputed  questions. 

He  also  takes  this  occasion  to  thank  his  brethren 
of  the  actuarial  profession,  whether  agreeing  en- 
tirely with  him  or  not,  all  of  whom  have  rendered 
him  important  assistance,  in  a  cause  directly  detri- 
mental to  their  material  interests,  not  excepting 
Professor  Bartlett,  the  present  actuary  of  the  Mu- 
tual Life.  Indeed,  to  the  writer,  altogether  the 
most  painful  incident  of  this  conflict  is  to  be 
obliged  to  say  what  he  has  of  some  of  the  life-in- 
surance studies  of  his  amiable  friend,  the  West 
Point  Professor.  His  mathematical  capacity  no- 
body questions.  But  even  a  war-horse  might  not 
know  how  to  work  a  bark-mill  till  he  had  tried  it. 
One  must  first  get  the  hang  of  any  machine  by  a 
little  practice.  The  writer,  at  any  rate,  has  made 
too  many  mistakes  himself  not  to  look  charitably  on 
those  of  others.  Perhaps  the  stars  can  be  got  at 
only  through  these  asperities. 

To  the  young  actuary,  first  of  the  Asbury  and 
now  of  the  Northwestern  Mutual  Life  Insurance 
Company,  of  Milwaukee,  Mr.  EMORY  McCLiNTOCK, 
not  only  thanks  are  due,  but  some  proof  of  the  able 
manner  in  which  he  has  won  them.  His  bravery 


222  Appendix. 

in  going,  in  spite  of  authority,  wherever  truth  leads 
him,  reminds  one  of  the  way  in  which  his  father, 
Rev.  John  McClintock,  D.  D.,  then  a  Professor 
in  Dickinson  College,  Carlisle,  Pa.,  in  1847, 
volunteered  in  defence  of  a  hunted  fugitive  slave, 
and  shared  arrest  along  with  his  negro  rescuers. 
Young  Mr.  McClintock's  mathematical  ability  will 
not  be  questioned — certainly  not  by  Professor  Bart- 
lett — and  his  ability  to  make  mathematical  logic  in- 
telligible to  ordinary  readers  is  such  that  the  fol- 
lowing extracts  from  his  papers  published  in  the 
"Insurance  Times  "of  1871  and  1872,  inserted  by 
his  kind  permission,  will  be  fully  worth  the  price 
of  the  volume. 


[From  the  Second  Paper,  Insurance  Times,  October,  1871.] 
The  proper  surrender  value  which  a  proprietary  company 
should  give,  in  the  absence  of  any  contract  on  the  subject,  is 
precisely  the  amount  which  it  is  to  its  interest  to  give.  To 
determine  this  amount  it  must  value  the  liability  about  to  be 
cancelled  by  a  rate  of  interest  as  high  and  a  rate  of  mortality 
as  low  as  there  is  reason  to  expect  for  the  future,  taking  credit 
for  future  premiums  in  gross,  diminished  by  a  percentage 
representing  cost  of  collection.  To  pay  more  than  the 
amount  determined  by  this  rule  would,  except  in  the  case  of 
an  impaired  risk,  be  extravagant ;  to  refuse  to  pay  as  much 
would  be  extortionate. 

A  mutual  company  should  pay  such  sum,  additional  to  the 
value  just  spoken  of,  as  represents  the  withdrawable  interest 
of  the  retiring  member  in  the  profits  of  the  concern.  'If  no 
rule  be  prescribed,  whether  by  charter  or  by  special  contract, , 
for  ascertaining  the  value  of  this  withdrawable  interest,  the 


Appendix.  223 

determination  of  the  sum  to  be  paid  is  always  and  entirely 
under  the  control  of  the  company. 

The  maximum  surrender  value  is,  as  Mr.  Wright  has  re- 
peatedly pointed  out,  that  amount  which,  together  with  the 
cost  of  replacing  the  risk  in  a  satisfactory  manner,  represents 
the  share  of  the  company's  assets  pertaining  to  the  policy  in 
question.  There  can  be  no  doubt,  moreover,  that  the  ten- 
dency of  the  business  is  to  make  the  surrender  value  of  poli- 
cies as  high  as  is  consistent  with  safety.  No  one  can  pretend 
that  a  company  is  injured  by  the  application  of  a  rule  by 
which  the  satisfactory  replacement  of  the  risk  is  secured.  On 
the  other  hand,  no  one  can  claim  that  it  is  unjust  to  levy  a 
surrender  charge  amply  sufficient  to  accomplish  this  object ; 
unless,  indeed,  a  similar  charge  has  been  deducted  already 
from  the  first  dividend.  This  proceeding  is  sometimes  re- 
sorted to,  I  believe,  though  (at  least  when  premiums  are  taken 
in  cash)  without  apparent  necessity. 

Exception  to  the  foregoing  -definition  of  the  maximum  sur- 
render value  appears  to  be  taken  by  Prof.  McCay,  in  the  cur- 
rent number  of  the  "  Spectator."  He  says : — 

"  The  deterioration  of  life  caused  by  the  second  selection, 
amounting  as  it  does  to  ten  or  twelve  per  cent,  among  those 
who  have  been  long  insured,  justifies  a  considerable  surren- 
der charge  to  those  who  withdraw  in  sound  health  and  with 
unimpaired  constitutions ;  and  that  no  company  can  properly 
and  justly  neglect  this  and  regulate  its  charge  by  the  cost  of 
supplying  the  place  of  the  retiring  member." 

The  article  referred  to  is  a  very  interesting  one  (leading,  as 
far  as  it  goes,  to  the  conclusion  that  reserves  should  be 
based  on  Dr.  Farr's  table),  but  does  not  warrant  the  conclu- 
sion apparently  reached  in  the  sentence  I  have  quoted.  It  is 
probable  that  Prof.  McCay  will  not  quarrel  with  me  if  I 
amend  this  sentence  by  adding  the  words,  "  by  another  of 
only  average  vitality."  If  the  retiring  member  be  satisfac- 
torily replaced  by  a  newly  selected  risk  of  equal  vitality,  the 


224  Appendix. 

company  cannot  justly  be  said  to  "neglect  this,"  or  any 
other  important  requirement. 

Where  the  surrender  value  of  a  policy  has  been  fixed  by 
previous  contract,  the  company  should,  year  by  year,  make 
the  reserve  large  enough  to  cover  (with  the  aid  of  such  undi- 
vided surplus  as  may  pertain  to  the  policy)  both  surrender 
value  and  surrender  charge. 

The  minimum  surrender  charge  is,  as  Mr.  Wright  remarks, 
"  not  what  the  individual  policy  cost,  but  what  it  would  cost  to 
get  another  equally  valuable."  It  must  be  determined  by  the 
company  with  reference  to  its  present  scale  of  expenditure, 
and  in  accordance  with  its  present  views  of  the  comparative 
value  of  different  classes  of  business.  Even  if  the  company 
pursue  a  stringent  course,  preferring  to  pay  surrender  values 
below  the  possible  maximum,  it  is  still  important  to  it  to 
know  the  limits  within  which  safety  lies.  Hence,  before  a 
company  can  be  said  to  have  a  correct  view  of  the  question 
of  surrender  value,  it  must  previously  have  a  correct  view  of 
the  comparative  value  of  different  classes  of  new  business — 
must,  in  short,  have  an  intelligent  mastery  of  the  question  of 

COMMISSIONS. 

The  scientific  discussion  of  this  question  has  been  inaugu- 
rated by  a  well-known  leader  of  opinion,  foremost  for  the 
last  twenty  years  in  every  important  movement  in  American 
life  insurance,  Elizur  Wright.  His  work  in  this  respect  is,  as 
I  believe,  as  important  as  any  that  he  has  accomplished.  It 
may  be  expanded  somewhat,  perhaps,  but  it  cannot  be  much 
improved. 

[From  the  Insurance  Times  of  December,  1871,  and  April  and  May,  1872.] 

ON  THE   COMPARATIVE  IMPORTANCE  OF  LIFE-INSURANCE 
POLICIES.    (By  E.  MCCLINTOCK.) 

Third  Paper. 

Some  of  Mr.  Wright's  views  on  this  subject  may  be  stated 
briefly,  and  I  trust  correctly,  as  follows : 


Appendix.  225 

1.  Every  life  contract  is  composite  in  its  nature,  virtually 
comprising  (1)  an  agreement  to  bold  in  deposit  on  interest  a 
portion  of  the  premiums  received,  and  (2)  an  agreement  to 
insure  a  varying  amount,  so  calculated  that  each  year  the 
amount  in  deposit;,  and  the  sum  really  insured,  or  "  amount 
at  risk,"  are  together  equal  to  the  sum  nominally  insured  by 
the  terms  of  the  policy.    This  is  the  "  Savings-Bank  theory," 
so  lucidly  and  effectively  developed  by  Mr.  Wright  during 
his  commissionership,  and  generally  adopted  by  American 
actuaries  as  at  once  the  most  equitable  and  most  convenient 
for  the  various  purposes  of  a  mutual  society. 

2.  Of  two  insurance  policies  which  are  to  continue  only  for  " 
the  term  of  one  year,  that  one  is  most  valuable  to  the  com- 
pany for  insurance  purposes  which  yields  the  larger  net 
premium.    As  the  measure  of  comparative  importance,  the 
net  premium  on  each  policy  of  this  kind  is  called  its  insur- 
ance value. 

3.  The  insurance  value  of  a  policy  which  is  to  continue 
more  than  one  year  is  made  up  of  the  net  premium  now  due 
for  the  amount  of  insurance  to  be  (really)  enjoyed  during  the 
first  year,  plus  the  present  value  of  the  net  premium  which, 
one  year  hence,  will  pay  for  the  insurance  to  be  (really) 
enjoyed  during  the  second  year,  plus  the  present  value  simi- 
larly computed  in  detail,  of  the  (real)  insurance  for  all  fur- 
ther years  of  the  term  contemplated. 

4.  No  scale  of  commissions  can  be  intelligently  adopted 
without  due  regard  to  insurance  values. 

These  four  propositions,  each  substantially  originated  by 
Mr.  Wright,  are  sufficiently  important  and  distinct  to  warrant 
detailed  examination. 

I. — SAVINGS-BANK  THEORY. 

Let  us  suppose  that  there  arc  doing  business  in  the  same 
neighborhood,  a  life-insurance  company,  an  annuity  compa- 
ny, and  a  savings  bank ;  that  each  allows  four  per  cent,  in- 

10* 


226  Appendix. 

» 

terest  for  money ;  that  the  two  former  make  use  of  the  Actu- 
aries' table  of  mortality,  an*d  that  the  insurance  company  will 
not  insure  lives  for  a  longer  period  than  one  year  at  a  time. 
Let  us  also  suppose  that  a  man  aged  thirty-five,  having  some 
money  in  hand,  wishes  to  apply  it  in  the  most  advantageous 
manner  to  the  purchase  of  two  years'  insurance  of  $10,000. 
What  is  he  to  do  ? 
The  terms  of  the  insurance  company  are : — 

To  insure  $1,000  for  1  year  at  age  35,  .       .       .       .     $8.931 
"  "  "  "       36,  .       .       .       .   -    9.122 

while  the  annuity  company  will,  in  consideration  of  $952.61 
paid  in  at  age  thirty-five,  pay  back  $1,000  if  the  party  live  to 
be  thirty-six,  and  in  the  same  proportion  for  smaller  sums. 

The  second  year's  insurance,  therefore,  will  cost  our  sup- 
posed applicant  $91.22  one  year  hence."  What  he  needs  to 
do  is  so  to  invest  his  money  as  to  secure  $10,000  for  his  heirs 
in  case  he  dies  within  the  first  year,  and  also  to  secure  $91.22 
one  year  hence  in  case  he  survives,  with  which  to  purchase 
the  second  year's  insurance.  He  has  his  choice  of  two 
plans : — 

He  can  secure  the  second  year's  premium  by  paying 
into  the  annuity  company  $91.22X. 95261,  or  .  .  $86  90 

Which,  together  with  the  first  year's  insurance  pre- 
mium,   89  31 

Makes  a  total  outlay  of    .       .       .       .         $176  21 

Or,  he  can  put  into  the  savings  bank  $87.71,  which  in  one 
year  will  yield  the  sum  of  $91.22,  sufficient  to  pay  for  the 
second  year's  insurance  should  he  survive  the  first  year.  If 
he  should  not  survive,  it  would  go  to  his  heirs.  This  being 
the  case,  he  requires  insurance  during  the  first  year,  not  for 
the  full  sum  of  $10,000,  but  for  the  difference  between  it  and 


Appendix. 


227 


the  amount  to  be  paid  by  the  savings  bank,  or  $9,908.78, 
which  insurance  he  applies  for,  paying  $9,908.78X .008931,  or 
$88.50.  Thus  he  pays  out  :— 


To  the  savings  bank, 

To  the  insurance  company, 

Total, . 


.   $87  71 
.      88  50 


.  $176  21 


Both  plans,  therefore,  produce  the  same  result — the  two 
years'  insurance  costs  him,  at  age  35,  $176.21,  which  amount 
he  considers,  in  either  case,  as  his  insurance  premium. 

So  also,  by  making  the  proper  calculations,  he  could  so 
arrange  his  payments  as  to  secure  the  benefits  which  are  con- 
ferred by  the  "  5-year  endowment  policy  "  in  actual  practice. 
Thus,  taking  first  the  supposition  that  he  works  through  the 
annuity  company,  his  accounts  would  stand,  year  by  year,  as 
follows :— 


A 

B 

C 

TEAK. 

Successive 
Endowments 
Wanted. 

Premium 
per  $1,000. 

Deposit 
Required. 

I;  :    :    :    :    : 

$1,811  52 
3,711  91 

$95.2607 
95.2418 

$1,725  66 
3,535  29 

3, 

5,706  37 

95.2224 

5  433  74 

4  :    :    .    :    : 

7,800  41 

95.2013 

7,426  09 

5, 

10,000  00 

95.1797 

9517  97 

That  is,  to  secure  $10,000  at  the  end  of  the  fifth  year  the 
company  would,  according  to  its  regular  terms,  require 
$9,517.97  to  be  placed  in  deposit  at  the  .beginning  of  that 
year ;  to  secure  $7,800.41  at  the  end  of  the  fourth  year  would 
need  $7,426.09  at  the  Beginning,  etc.  '  Let  us  see  where  the 
money  comes  from : — 


228 


Appendix. 


C 

A 

D 

YEAR. 

Deposit 
Required. 

Previous 
Endowment. 

Cash 

Required. 

L 

$1,725  66 

$1  725  66 

2 

3,535  29 

$1  811  52 

1  723  77 

1;  :    :    :    :    : 

5,433  74 

3,711  91 

1,721  83 

4,     

7,426  09 

5,706  37 

1,719  72 

5, 

9,517  97 

7  800  41 

1  717  56 

The  amounts  in  column  A  (corresponding  to  the  reserve  on 
an  ordinary  five-year  endowment)  are  secured,  therefore,  by 
the  yearly  payments  stated  in  column  D.  In  addition  to  this 
transaction  with  the  annuity  company  there  is  the  insurance 
of  $10,000  to  be  paid  for,  according  to  the  regular  yearly 
rates  of  the  insurance  company.  Thus  the  total  sums  to  be 
paid  out  would  be : — 


D 

E 

F 

YEAR. 

Cost 
Endowment. 

$10,000 
Insurance. 

Total 
Cost. 

1  :    :    :    :    : 

$1,725  66 
1,723  77 

$89  31 
91  20 

$1,814  97 
1,814  97 

$>..... 

1,721  83 

93  14 

1  814  97 

4, 

1  719  72 

95  25 

1  814  97 

5 

1,717  56 

97  41 

1,814  97 

The  foregoing  statement  represents  the  progress  of  an  or- 
dinary five-year  endowment  as  analyzed  into  the  two  ele- 
ments of  endowment  and  insurance,  in  accordance  with  what 
may  be  called  the  "  endowment  theory,"  of  life  insurance. 
This  theory  is  held  more  or  less  consistently  by  those  who 
reject  the  "  savings-bank  theory."  fey  the  one  theory  the 


Appendix.  229 

transactions  of  a  life  company  are  a  combination,  more  or 
less  complicated,  of  insurance  business  and  endowment  busi- 
ness ;  by  the  other,  of  insurance  business  and  savings-bank 
deposit  business.  Let  us  now  analyze  the  same  policy  on  the 
"savings-bank  theory."  Our  supposed  applicant  for  insur- 
ance now  deals  through  the  savings  bank  instead  of  through 
the  annuity  company,  as  in  the  last  case.  The  deposit  ac- 
count will  stand  as  follows : — 

First  deposit, $1,741  84 

Interest  4  per  cent.,* 69  68 


End  of  first  year, $1,81152 

Second  deposit, 1,757  62 

$3,569  14 
Interest, 142  77 


End  of  second  year, $3,711  91 

Third  deposit, 1,774  98 


$5,486  89 
Interest, 219  48 


End  of  third  year, $5,706  37 

Fourth  deposit, 1,794  02 

$7,500  39 
Interest, 300  02 

End  of  fourth  year,    .......    $7,800  41 

Fifth  deposit, 1,814  97 

$9,615  38 
Interest, 384  62 

End  of  fifth  year, $10,00000 

So  that  in  case  our  depositor  lives  five  years,  he  receives  his 
f  10,000  from  the  savings  bank.    In  case  he  dies  in  the  mean- 


230 


Appendix. 


time,  the  accumulations  go  to  the  heirs ;  and  all  that  he  needs 
to  insure  his  life  for  is  the  difference  each  year  between  these 
sums  and  $10,000.  Thus  :— 


A 

0 

m 

H 

YEAE. 

Accumulation. 

Insurance 
Required. 

Cost 
per  $1,000. 

Insurance 

Cost. 

1  :  :  :  : 

!;    :    :    :    : 

$1,811  52 
3,711  91 
5,706  37 
7,800  41 

$8,188  48 
6,288  09* 
4,293  63 
2,199  59 

$8.931 
9.120 
9.314 
9.525 

$73  13 
57  35 
39  99 
20  95 

5,         .... 

10,000  00 

The  total  payments  will  therefore  be : — 


I 

H 

F 

YEAR. 

Savings  Bank. 

Insurance  Co. 

Total. 

1,              .         .         . 

$1,741  84 

$73  13 

$1,814  97. 

2,             ... 

1,757  62 

5735 

1,814  97 

3,             ... 

1,774  98 

39  99 

1,814  97 

4,             ... 

1,794  02 

20  95 

1,814  97 

5,           ... 

1,814  97 

" 

1,814  97 

By  dealing  through  the  annuity  company,  the  insurer  would 
pay  to  that  company  each  year  the  amount  stated  in  column 
D,  and  also  to  the  insurance  company  that  in  column  E ;  total, 
$1,814.97  per  annum.  By  dealing  through  the  savings  bank, 
he  would  each  year  deposit  the  amount  stated  in  column  I, 
and  pay  to  the  insurance  company  that  in  column  H ;  total, 
$1,814.97  per  annum.  In  either  case  the  cost  would  be  the 
same,  and  the  benefits  purchased  the  same ;  so  that  it^may  be 
considered  a  matter  of  entire  indifference  to  the  insurer 
whether  he  act  on  the  "  endowment  theory,"  operating  through 


Appendix.  231 

the  annuity  company,  or  on  the  "  savings-bank  theory," 
through  the  savings  bank. 

Let  us  now  suppose  fhat  the  three  companies  are  one  and 
the  same.  The  net  premium  for  two  years'  insurance,  at  age 
35,  will  still  be  $176.21,  and  the  company  can  analyze  it  in 
either  way,  as  it  pleases.  Thus  the  cashier  receiving  the 
premium  may  keep  his  books  on  the  "  endowment  theory," 
and  enter  it  thus : — 

By  premium  to  insure  $10,000  for  1  year,     .       .       .   $89  31 
By  premium  to  secure  endowment  of  $91.22,       .  86  90 


$176  21 
or  on  the  "  savings-bank  theory,"  making  the  entry  thus : — 

By  premium  to  insure  $9,908.78, $88  50 

By  deposit  on  interest,    . 87  71 

$176  21    • 

Every  possible  kind  of  life-insurance  policy  might  be  ana- 
lyzed like  the  two  cases  we  have  considered  on  both  of  the 
two  theories,  which  are  equally  admissible  in  all  calculations 
regarding  premiums  and  reserves,  giving  always  the  same 
results.  But  when  we  leave  these  subjects  to  discuss  the 
economical  questions  which  continually  come  up,  such  as 
loading,  division  of  surplus,  surrender  value,  &c.,  we  are 
compelled  to  make  our  choice  between  these  two  theories  or 
run  the  risk  of  self-contradiction.  O£  the  two,  the  "  savings- 
bank  theory "  is  more  or  less  explicitly  conceded  by  most 
American  actuaries  to  be  more  convenient  and  accurate. 

A  rigid  adherence  to  the  savings-bank  theory  (viz.,  that  a 
life-insurance  company's  business  is  compounded  of  insurance 
and  deposit  business)  would  lead  us  to  discard  "  pure  endow- 
ments," "  children's  endowments  "  and  il  annuities  "  from  our 
rate  books.  It  would,  on  the  other  hand,  effect  a  good  pur- 


232  Appendix. 

pose  in  banishing  from  our  minds  the  unnecessary  and  even 
hurtful  notion  that  the  endowment  assurance  policy  is  in  all 
respects  equivalent  to  a  combination  of  the  pure  endowment 
and  the  term  assurance  policy.  This  notion  still  crops  out  in 
all  sorts  of  places,  and  is  the  fruitful  source  of  many  miscon- 
ceptions. For  example,  in  a  recent  discussion  of  the  surren- 
der-value question,  the  author  adhered  rigidly  to  the  sav- 
ings-bank method  in  treating  of  ordinary  life  and  term 
policies,  but  abandoned  it  when  it  came  to  endowments ;  so 
that  the  surrender  value  of  the  so-called  "  insurance  part "  of 
an  endowment  assurance  policy  would  be  determined  in  ac- 
cordance with  the  principles  of  the  "  savings-bank  theory," 
and  that  of  the  so-called  "  endowment  part"  of  the  same  pol- 
icy in  accordance  with  those  of  the  "  endowment  theory." 
Again,  a  singular  belief,  based  obviously  on  the  same  notion, 
finds  currency  in  some  quarters,  to  the  effect  that  the  "  en- 
dowment part "  exactly  balances  the  "  insurance  part "  in 
respect  to  risk.  A  company  was  once  solemnly  informed,  I 
am  told,  by  its  adviser,  that  for  the  cause  just  stated  "  no 
profit  is  ever  made  on  endowment  assurance  policies  by  rea- 
son of  diminished  mortality ! "  This  singular  belief  must 
certainly  lie  at  the  bottom  of  the  practice  of  many  officers, 
who  accept  risks  for  endowment  policies  which  would  not  be 
taken  on  the  whole-life  or  term  plan.  Thus  a  doubful  risk 
would  by  some  be  speedily  accepted  for  a  five-year  endow- 
ment for  $10,000  which  would  not  be  taken  on  either  of  the 
other  plans  for  $1,000,  the  idea  apparently  being  that  the 
quality  of  the  risk  is  somehow  improved  by  swelling  the  pro- 
portionate size  of  the  premium.*  In  other  words,  if  a  doubt- 
ful risk  were  proposed  (see  column  G  above)  for  simple  insur- 
ance of  $8,000  the  first  year,  $6,000  the  second,'  $4,000  the 
third,  and  $2,000  the  fourth,  it  would  be  instantly  rejected ; 

*  Which,  for  a  given  sum  insured,  only  reduces  the  quantity  of  the 
risk.  E.  W 


Appendix.  233 

but  the  same  risk  accompanied  by  an  agreement  on  the  part 
of  the  applicant  to  make  a  large  deposit  in  the  company's 
bank  is  gladly  accepted. 

The  delusion  is,  that  this  deposit  "reduces  the  risk"; 
whereas  the  fact  is,  that  it  is  simply  and  purely  a  bank  deposit, 
belonging  for  life  or  death  to  the  depositor ',  and  having  no 
more  real  connection  with  the  insurance  risk  than  a  corre- 
sponding deposit  in  a  bank  across  the  street  would  have.  The 
amounts  risked  by  the  company  on  a  five-year  endowment 
issued  #t  35  are  stated  above  in  column  G ;  and  they  remain 
the  same  whether  the  applicant  pays  the  large  premiums  of 
column  F,  on  which  the  company  congratulates  itself  as  "  re- 
ducing the  risk,"  or  the  small  premiums  of  column  H.  The 
insurance  risk  is  unchanged  by  getting  the  large  premium ; 
the  investment  department  of  the  company  is  burdened  a 
little  temporarily,  and  that  is  all. 

It  may,  however,  be  objected,  that  on  this  policy  the  risk  is 
really  less  than  on  a  life  or  term  policy  for  $10,000.  This  is 
true.  The  risk  of  the  company  on  this  policy  is  only  about 
equal  to  that  on  a  term  policy  for  $4,000.  But  the  question 
is,  would  you  take  that  risk  for  $4,000  on  a  term  policy  ?  If 
you  would,  you  are  safe  in  accepting  the  risk  for  a  $10,000 
five-year  endowment — and  not  otherwise. 

I  have,  perhaps,  said  more  than  enough  to  explain  my  rea- 
sons for  agreeing  with  what  I  have  called  Mr.  Wright's  First 
Proposition.  The  still  wide  prevalence  of  inexact  views 
respecting  the  "  savings-bank  theory  "  must  be  my  excuse. 

To  sum  up :  the  "  savings-bank  theory  "  and  the  "  endow- 
ment theory  "^are  equally  tenable,  mathematically.  Life  in- 
surance is  made  up  of  yearly  insurances  plus  savings-bank 
deposits,  or  of  yearly  insurances  plus  yearly  endowments. 
Of  the  two  theories  the  former  is  the  simpler,  and  is  gener- 
ally preferred. 

If  the  reader  holds  the  opinion  that  the  savings-bank  theory 
is  incorrect  and  untenable — an  opinion  frequently  expressed 


234  Appendix. 

by  insurance  writers,  mostly  anonymous — he  may  as  well 
read  this  article  no  further.  Objecting  to  my  premises  he 
cannot  feel  interest  in  my  conclusions.  It  is  always  a  good 
exercise  of  mind,  when  you  disagree  with  a  writer,  to  deter- 
mine to  your  own  satisfaction  the  precise  point  at  which  you 
part  company  from  him. 

H. — INSURANCE  VALUE  OF  YEARLY  POLICIES. 

What  I  have  set  down  as  Mr. -Wright's  Second  Proposition 
is,  that  of  two  policies  securing  insurance  for  the  term  of  a 
single  year,  that  one  is  most  valuable  to  the  company  which 
yields  the  larger  net  premium,  and  that  the  relative  value  of 
each  policy  is  measured  by  the  net  premium,  which  in  this 
connection  is  called  the  "  insurance  value."  This  proposition 
may  be  thus  sub-divided : — 

1.  The  insurance  value  of  a  one-year-term  policy,  the  age 
being  given,  varies  directly  as  the  amount  assured.    That  is, 
a  policy  for  $10,000  is  ten  times  as  valuable  to  the  company 
as  one  for  $1,000.    From  the.point  of  view  of  the  secretary, 
cashier,  and  collecting  agent  it  may,  perhaps,  be  regarded  as 
more  than  ten  times  as  valuable ;  or,  in  other  words,  it  may 
be  thought  that  one  policy  of  $10,000  is  less  troublesome  and 
therefore  more  desirable  than  ten  policies  of  $1,000.    This 
feeling  formerly  found  expression  in  the  policy-fee,  a  tax  on 
small  policies.    From  the  mortuary  point  of  view,  however, 
it  is  sometimes  argued  that  ten  policies  of  $1,000  each  are 
better  worth  having  than  one  policy  of  $10,000 ;  and  in  view 
of  the  almost  universal  discontinuance  .of  the  policy-fee  sys- 
tem,dt  may  be  considered  as  agreed  that,  on  the  whole,  the 
company  may  justly  regard  all  sizes  of  polfcy  with  equal 
favor. 

2.  The  insurance  value  of  a  one-year  term  policy,  the 
amount  being  given,  varies  directly  as  the  rate  of  mortality 
indicated  by  the  age  of  the  party.     That  is,  if  a  man  at  40 
pays  (net)  $10  for  a  year's  insurance  of  $1,000,  and  one  at  54 


Appendix.  235 

pays  $20  for  the  same  benefit,  the  latter  policy  is  twice  as 
important  as  the  former — is,  in  fact,  worth  as  much  to  the 
company  as  two  policies  like  the  former.  This  view  is  in 
accordance  with  the  almost  universal  practice  of  the  business 
and  the  almost  universal  opinion  of  insurance  officers.  It 
is,  however,  not  quite  so  clearly  settled  as  that  twice  two 
make  four.  It  is  certain  that,  loading  apart,  a  man  aged  54 
can  afford  to  pay  twice  as  much  per  $1,000  as  one  aged  40, 
but  it  is  not  so  clear -that  he  should  contribute  proportionally 
to  the  running  expenses  of  the  society.  It  is  a  possible 
hypothesis  that  insurance  of  $1,000  is  worth,  morally,  and 
apart  from  the  net  payment  necessary  to  cover  the  risk,  as 
much  to  the  man  aged  40  as  to  the  one  aged  54,  or  at  any 
rate  more  than  half  as  much.  It  is,  therefore,  a  debatable 
question  whether  the  loading  on  the  premium  for  one  year's 
assurance  should  be  a  function  of  the  premium  or  of  the 
amount  assured,  or  of  both. 

Assuming  the  general  opinion  in  favor  of  assessing  ex- 
penses on  such  policies  by  a  uniform  percentage  on  premi- 
ums to  be  the  correct  one,  it  cannot  be  denied  that  a  one- 
year  policy  which  contributes  twice  as  much  to  the  insurance 
fund,  and  twice  as  much  to  the  expense  fund  as  another,  is 
worth  twice  as  much  to  the  company.  Let  it  be  observed, 
moreover,  that  even  supposing  this  now  general  opinion  to 
be  discarded,  the  importance  of  estimating  insurance  values 
on  the  general  principles  urged  by  Mr.  Wright  would  not  be 
diminished,  though  the  intricacy  of  the  necessary  calcula- 
tions might  be  considerably  increased. 

IH. — INSURANCE  VALUE   OF  POLICIES  IN  GENERAL. 

Assuming,  therefore,  the  savings-bank  theory  as  a  basis, 
and  assuming  that  the  net  premium  is  the  most  convenient 
measure  of  the  value  to  the  company  of  simple  assurances 
confined  to  a  single  year,  let^us  now  consider  some  of  the 
more  complicated  cases  arising  from  the  various  combina- 
tions of  the  elements  of  insurance  and  deposit. 


236  Appendix. 

In  a  case  already  supposed,  we  found  the  net  premium 
which  a  man  aged  36  would  need  to  pay  for  a  year's  assur- 
ance of  $10,000,  to  be  |91.22 ;  and  at  age  35  for  two  years' 
insurance  of  the  same  amount,  $176,21.  On  analyzing  the 
latter  premium  we  found  it  to  consist  of  two  parts : — 

Premium  to  insure  $9,908.78  for  one  ye^r,    .       .       .   $88  50 
Deposit  on  interest, 87  71 


$176  21 

The  contract  might,  therefore,  be  described  as  a  compound 
agreement,  consisting  of  (1)  an  agreement  to  hold  $87.71  on 
deposit  for  one  year,  at  four  per  cent,  interest,  amounting  at 
the  end  of  the  year  to  $91,22,  and  (2)  an  agreement  to  insure 
$9,908.78  for  one  year  for  an  advance  payment  of  $88.50,  and 
also  to  insure  $10,000  the  second  year  for  a  payment  one 
year  hence  (transferred  from  the  deposit  department)  of 
$91.22.  By  this  arrangement,  in  case  of  death  the  first  year, 
the  company  pays  over  to  the  beneficiary  the  amount  of  de- 
posit, $91.22,  and  the  amount  of  insurance,  $9,908.78,  making 
$10,000 ;  and  in  case  of  death  the  second  year  the  whole 
amount  of  $10,000  is  drawn  from  the  insurance  fund. 

Considering  first  that  portion  of  the  contract  which  pro- 
vides for  assurance  during  the  second  year  (age  36,  amount 
$10,000,  premium  to  be  then  paid  $91.22),  we  may  conclude 
that,  one  year  hence,  its  value  to  the  company  may  be 
measured  by  the  net  premium  then  payable,  or  $91.22.  Tak- 
ing next  that  portion  of  the  contract  which  provides  for  im- 
mediate insurance  of  $9,908.78,  we  may  measure  its  present 
value  by  the  net  premium  now  due,  or  $88.50.  If,  therefore, 
we  add  to  $88.50  the  present  value  of  $91.22,  we  shall  have 
the  total  value  to  the  company  of  the  insurance  part  of  the 
contract,  or  what  Mr.  Wright  c^lls  the  insurance  value  of  the 
policy. 

In  finding  the  present  value  of  business,  which  will  be 


Appendix.  237 

worth  $88.50  (or  some  percentage  of  that  sum  taken  as  a 
measure)  one  year  hence,  we  are  not  bound  to  follow  the 
original  standards  of  mortality  and  interest,  but  may  use 
such  assumptions  as  are  warranted  by  our  best  judgment, 
having  regard  to  the  probable  actual  experience  of  the  future, 
while  retaining  the  original  standards,  of  course,  in  all  calcu- 
lations of  premiums  and  reserves.  Mr.  Wright  considers  it 
convenient  to  follow  the  assumptions — Actuaries'  4  per  cent. — 
of  his  published  tables.  Pursuing  this  course,  we  should  find 
the  present  value  at  age  35  of  $91.22  at  age  36  to  be  $86.90. 
Adding  this,  the  present  value  of  the  insurance  to  be  done  by 
the  company  the  second  year,  to  $88.50,  the  value  of  the  first 
year's  insurance,  we  have  $175.40  as  the  insurance  value  of 
the  policy  in  question.  And,  disregarding  the  value,  what- 
ever it  may  be,  of  the  "  deposit  part "  of  the  contract,  we  may, 
by  a  like  analysis,  conclude  with  reference  to  any  other 
policy,  that  its  insurance  value  is  equal  to  "  the  net  premium 
now  due  for  the  amount  of  insurance  to  be  (really)  enjoyed 
during  the  first  year,  plus  the  present  value  of  the  net  premi- 
um which,  one  year  hence,  will  pay  for  the  insurance  to  be 
(really)  enjoyed  during  the  second  year,  plus  the  present 
value,  similarly  computed  in  detail,  of  the  (real)  insurance 
for  all  further  years  of  the  term  contemplated,"  a  definition 
which  I  have  taken  the  liberty  to  call  Mr.  Wright's  Third 
Proposition. 

The  <§  deposit  part"  of  a  contract  has  its  value,  of  course, 
even  though  a  comparatively  small  one.  We  shall  no  doubt 
find,  on  investigation,  that  the  best  measure  of  the  "  deposit 
value"  of  a  policy  is,  the  amount  agreed  to  be  held  in  deposit 
the  first  year,  plus  the  present  value  of  that  agreed  to  be 
held  the  second  year,  plus,  &c. 

IV.— COMMISSIONS. 

"No  scale  of  commissions  can  be  intelligently  adopted 
without  due  regard  to  insurance  value."  This  remark,  which 


238  Appendix. 

I  have  called  Mr.  Wright's  Fourth  Proposition,  naturally  fol- 
lows from  the  preceding  considerations.  We  may  presume 
that  a  percentage  of  the  insurance  value  of  a  policy,  plus 
sorfte  other  percentage  of  its  deposit  value,  would  best  repre- 
sent the  pecuniary  worth  of  the  contract  to  the  company. 
While  not  insisting  on  the  expediency  of  a  daily  resort  to 
calculations  so  intricate  as  are  here  indicated,  I  cannot  but 
think  that  some  knowledge  of  the  results  to  which  such  cal- 
culations lead  must  prove  of  the  highest  value  to  those  who 
may  hereafter  have  occasion  to  deal  with  the  question  of 
commissions;  and  that  the  thanks  of  all  concerned  are 
eminently  due  to  the  Hon.  Elizur  Wright  for  the  initiation 
and  vigorous  prosecution,  in  this  connection,  of  a  radical 
reform. 


—1  ~ 


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